Treasury claims Chancellor’s Mansion House Reforms to boost typical pension by over £1,000 a year*

*not a financial promotion

This is the text the Government released in advance of Jeremy Hunt’s Mansion House speech.in which he will launch his “Mansion House Reforms” on the evening of Monday 10^th July.

It should be read alongside commentary on this blog, in bold italics.

The headlines

• Chancellor outlined reforms to boost pensions and increase investment in British businesses.
• The “Mansion House Reforms” could unlock an additional £75 billion for high growth businesses, while reforms to defined contribution pension schemes will increase a typical earner’s pension pot by 12% over the course of a career.
• Comprehensive reforms will increase pension pots by as much as £16,000.

Most people will consider this £1.000 pensioner pay rise is as likely as flying pigs. But it follows the logic of Hymans Robertson’s 10-10-10 formula. That’s to say – pay 10bps more , invest 10% more in growth and get 10% more in your pot. All the same-  if this was classified a financial promotion, I’m sure the  like to see the math!

“Unlock” means – “switched”, the improvements in pensions come from improved assumptions on returns from private rather than public markets. This is not new money

The United Kingdom has the largest pension market in Europe, worth over £2.5 trillion. Over the past ten years Automatic Enrolment has helped an extra ten million people save for their futures, with £115 billion saved in 2021, but how this money is invested is limiting returns for savers. Comparable Australian schemes invest ten times more in private markets than UK schemes, reaping the rewards that UK savers are missing out on.

To level the playing field, the Chancellor and the Lord Mayor have supported an agreement between nine of the UK’s largest Defined Contribution pension providers, committing them to the objective of allocating 5% of assets in their default funds to unlisted equities by 2030. These providers represent over £400 billion in assets and the majority of the UK’s Defined Contribution workplace pensions market.

• The Mansion House Compact members are: Aviva; Scottish Widows; L&G; Aegon; Phoenix; Nest; Smart Pensions; M&G; Mercers. (note those not on the list, including Royal London, Cushon, Now, WTW , Aon, NPT, SEI , Crystal and People’s Partnership)
• The package of reforms announced today could help increase pension pots for an average earner who starts saving at 18 by 12% over their career – over £1,000 more a year in retirement – all whilst supporting UK economy, businesses, and employment. If this were a financial promotion (pt 2)
• Analysis shows a difference in returns between schemes over a 5-year period of up to 46% in some cases. This means that a saver with a pot of £10,000 could have notionally lost £5,000 over a 5-year period from being in a lowest performing scheme.

This could unlock up to £50 billion of investment in high growth companies by 2030 if all UK Defined Contribution pension schemes follow suit.  Note, the Compact are not offering £50bn, they are priming the pump with 5% of default assets invested in a fund operated by the British Business Bank and inspired by Sir Nicholas Lyons (Mayor and Chair of Phoenix)

Chancellor of the Exchequer Jeremy Hunt said:

“British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for typical earner over the course of their career. 

“This also means more investment in our most promising companies, driving growth in the UK.” 

Secretary of State for Work and Pensions Mel Stride said:

Mel Stride

“British workers should have the confidence that their pension savings are working as hard as they are.  (clearly inspired by this blog which coined this catchphrase). Mel – you owe me!

“Our reforms will benefit savers and society – unlocking investment into pioneering UK businesses, growing the economy, and helping the record number of people in this country saving into a pension to achieve the retirement they want.”  

VFM Framework top priority

The Chancellor’s Mansion House Reforms will also deliver better returns for savers through a new Value for Money Framework which will make clear that investment decisions made by pension firms should be based on overall long-term returns and not simply costs. Pension schemes which are not achieving the best possible outcome for their members will be wound up into larger, better performing schemes. Clear hint here that VFM is primarily measured by performance not by quality of service or the AMC. We look forward to hearing more in the next few days.

Analysis shows that over a five-year period there can be as much as 46% difference between the best and worst performing pension schemes. This means that a saver with a pot of £10,000 could have notionally lost £5,000 over a 5-year period from being in a lowest performing scheme.

Alignment with Treasury thinking

The Mansion House Reforms will be guided by the Chancellor’s three golden rules: to secure the best possible outcome for pension savers; to always prioritise a strong and diversified gilt market as we seek to deliver an evolutionary, rather than revolutionary, change in our pensions market; and to strengthen the UK’s position as a leading financial centre to create wealth and fund public services.  Since when have these been anyone’s golden rules?

To ensure that the money unlocked by these reforms is invested quickly and effectively, the Chancellor has asked the British Business Bank to explore the case for government to play a greater role in establishing investment vehicles, drawing upon the BBB’s skills and expertise.

In addition to LIFTS

This will complement the £250 million of support that government has made available through the Long-term Investment for Technology and Science (LIFTS) initiative to incentivise new industry-led investment vehicles.  (all good)

CDC to be “encouraged”

The Government will also encourage the establishment of new Collective Defined Contribution funds which can invest more effectively by pooling assets. Suggests the game’s up for RM style CDC.

Pension Trustees to overcome “cultural barriers”

The Government is set  to  launch a call for evidence to explore how we can support pension trustees to improve their skills, overcome cultural barriers and realise the best outcomes for their pension schemes and subsequently their members. What are the cultural barriers that pension trustees need to overcome? We need a pensions Les Patterson

Trustees need a new culture

.

LGPS to invest £25bn more in private equity by 2030

For the Local Government Pension Schemes a consultation will be launched on setting an ambition to double existing investments in private equity to 10%, which could unlock £25 billion by 2030. The consultation proposes a deadline of March 2025 for all Local Government Pension Scheme funds to transfer their assets into LGPS pools and setting a direction that each pool should exceed £50 billion of assets.

LGPS funds are wary of this – fearing a loss of independence and capacity to level up, however this looks a good next step.

Pension Superfunds to have their own regulatory regime

To improve outcomes for savers in a highly fragmented market, with over 5,000 Defined Benefit Schemes, the Government will set out its plans on introducing a permanent superfund regulatory regime to provide sponsoring employers and trustees with a new way of managing Defined Benefit liabilities.

Many years too late but welcome nonetheless

Call for evidence on investment upgrade for the PPF

A new call for evidence will also launch tomorrow on the possible role of the Pension Protection Fund and the part Defined Benefit schemes could play in productive investment whilst securing members’ interests and protecting the sound functioning and effectiveness of the gilt market.

This should be generally welcomed as the PPF is taking too little investment risk , LCP’s proposals for an upgrade to PPF benefits should be part of the call for evidence.

Boost to London Stock Exchange

The UK has the largest stock market in Europe and one of the deepest in the world – the London Stock Exchange had the most Initial Public Offerings (IPOs) outside of the US in 2021.

A comprehensive set of reforms will help attract the fastest growing companies in the world to grow and list in the UK. Prospectuses will be simplified, another milestone of Lord Hill’s UK Listing Review, replacing the EU’s outdated regime.

Firm’s prospectuses for investors will be easier to produce, more accessible and understandable, saving companies time and money and attracting more firms to do business in the UK.

Untying EU red tape

Protectionist rules inherited from our time in the EU will be abolished. The Share Trading Obligation and Double Volume Cap have held back UK businesses and will be removed so firms can access the best and most liquid markets anywhere in the world.

The Government has also accepted all of Rachel Kent’s Research Review published today, paving the way for a new ‘Research Platform’ that will provide a one-stop-shop for firms looking for research experts. It also sets the path for potentially removing the unbundling rules – an inherited EU law that requires brokers to charge a separate fee for research.

New intermittent trading vehicle for private companies

Chancellor has also set out plans for a new kind of trading place that connects private and public markets. This ‘intermittent trading venue’ will allow private companies to access public markets, helping them grow and driving more economic activity – the first of its kind worldwide.

This builds on the Chancellor’s Edinburgh Reforms and Solvency II reforms which will unlock over £100 billion of productive investment from insurance firms across the UK over a decade.

Fast moving regulators

To ensure the continued success of the UK’s world-leading financial services sector, firms must be ready to innovate faster, with regulators willing to support them as they do.

Following the Financial Services and Markets Act 2023 passing into law, the government has announced that it is commencing repeal of almost 100 pieces of unnecessary retained EU law for financial services, further simplifying the UK’s regulatory rulebook.

Digital share trading

The government also welcomes a report suggesting ways to move to fully digital shares, scrapping outdated paper-based shares. This will make markets more efficient and modernize how people own shares.

Reaction to the Chancellor’s Mansion House Reforms

A lot of important people agreeing with the Government

Sir Jon Symonds CBE, Chair, GSK said:

“I welcome these important reforms which will further strengthen the UK capital markets and support economic growth.  The changes will help increase investment returns for pension savers through improved access to all asset classes including in high growth sectors, and ensure the UK’s most innovative companies are better supported by UK capital to stay in this country as they scale to maturity.”

C. S. Venkatakrishnan, Group Chief Executive, Barclays said:

“The UK has needed a bold, forward-looking policy agenda and industrial strategy to grow the economy. These Mansion House Reforms are an important step in the right direction in mobilising private capital to support growth and innovation.” 

Irene Graham OBE, CEO, ScaleUp Institute said:

“The package of measures announced by the Chancellor today are very much welcomed by the ScaleUp Institute. They contain significant and innovative solutions which will help to enable easier and simpler access to capital markets and patient growth capital. These new initiatives, coupled with the reforms already underway, will support and fuel the global ambitions of our scaleups, and high-potential scaling businesses, across all sectors and all areas of the UK.”

Miles Celic, Chief Executive Officer, TheCityUK, said:

“The competitiveness and attractiveness of any successful international financial centre must, by definition, always be a work in progress. The Chancellor is right to be ambitious in building on the UK’s successes and recognising that we can’t afford to be complacent. 

“The Mansion House Reforms are ambitious, pragmatic and necessary. They will underpin the UK industry’s future success. Most importantly, their main beneficiaries will be the British people, who will gain from greater investments in growing businesses, revitalising communities and improving retirements.”

Chris Hulatt, Co-Founder, Octopus Group said:

“We welcome government’s efforts to make the UK a more attractive place to start a business, and support measures that provide additional opportunities for private companies to raise capital. 

“Finding new ways for the most skilled and talented entrepreneurs to access capital as they build businesses is fundamental to helping the UK maintain its place as the best place to start, build and scale a business.”

Noel Quinn, Group Chief Executive, HSBC said:

“I welcome the strong and comprehensive package of measures announced by the Chancellor in his Mansion House speech.  Unlocking equity to support companies in innovative high-growth sectors such as technology and life sciences is vital to the future growth of the UK economy.”

Lord Mayor, Nicholas Lyons said:

“These reforms and the Mansion House Compact mark a historic turning point that will accomplish the dual aim of securing a brighter future for retirees and channelling billions into our economy.  I’m proud to have convened key industry players to make this commitment to unlock £50bn in capital by the end of the decade which will improve returns for pension savers and support firms to grow, stay and list in the UK.”

Tim Orton, Chief Investment Officer, Aegon UK said:

“Aegon UK is proud to be a founder signatory of the Mansion House Compact which will help deliver better long-term outcomes for our customers. We are committed to ensuring our customers can access and share in the growth and success of innovative companies we invest in. We will use our scale and expertise to develop investment solutions seeking to improve the retirement outcomes of the millions of members of the defined contribution pension schemes we support.  The Compact will also create opportunities that help deliver our climate targets as we progress towards net zero.”

Sir Nigel Wilson, Group CEO, Legal & General said:

“As the UK’s largest manager of money for pension clients, L&G is pleased to support the ambition set by the Compact. Increasing investment in science, technology and infrastructure will support better returns for the tens of millions saving for their retirement, as well as stimulate much needed long-term growth for the UK economy.”

Mark Fawcett, CEO, Nest Invest said:

“For many years now, illiquid assets have been integral to diversified DC pension schemes around the world. It’s been a key driver behind Nest setting up our own private market mandates to ensure our members aren’t missing out. Nest will continue to increase our investment in unlisted equities, helping our 12 million members benefit from the strong returns these types of deals can typically offer.”

Ruston Smith, Chair, Smart said: 

“Smart Pension is committed to securing better outcomes for long-term savers. Giving UK savers access to higher net returns by investing in unlisted equities, including innovative, high-growth UK companies as part of a well diversified portfolio, will deliver these outcomes over time. We are pleased to be a signatory of the Mansion House Compact and, as a successful British fintech, we are proud to be supporting the country’s technology sector, helping home-grown start-ups and scale-ups to flourish and thrive.”

Scottish Widows, CEO, Chriantan Barua said:

“The industry needs to modernise the investment options available to customers.  With the right consumer protections in place, the proposals announced today could make a huge difference to our customers and the wider UK economy. I’m proud that Scottish Widows is a founding signatory of the Mansion House Compact.”

Phil Parkinson, Investments and Retirement Leader, Mercer said:

“Mercer supports proposals that lead to improved pension scheme member outcomes. As a global investment solutions provider, we see first-hand the value that illiquid asset allocations can bring to investors’ portfolios from a risk and a return perspective and are in favour of initiatives designed to unlock this asset class for DC members.”

Edward Braham, Chair, M&G said: 

“Patient capital put to work in companies or projects over multiple decades is essential to support economic growth and importantly, capture value for people’s pensions as they save for their retirement. M&G’s heritage is in investing in private markets, whether it is through infrastructure, real estate or innovative companies with purpose. We are democratising access to private markets through the Prudential With Profits Fund, and are supportive of DC pension reforms that encourage more investment of this kind that has potential to result in positive outcomes for savers.”

Mike Eakins, Chief Investment Officer, Phoenix Group said:

“We are proud to sign the Compact, which is an important step to allow UK long-term savers to invest in a more diversified portfolio, giving them access to the potential returns of a broader range of assets, in line with their international counterparts. Currently, only 9% of UK pension funds are invested in alternative assets as compared to 23% in other major pensions markets. With the right regulatory environment, Phoenix Group could invest up to £40bn in sustainable and/or productive assets to support economic growth, levelling up and the climate change agenda whilst also keeping policyholder protection at its core.”