The government's drive towards increasing the amount of investment by pension schemes in "UK Plc" took another step forwards over the weekend, with Chancellor Jeremy Hunt announcing plans to require defined contribution ("DC") schemes to disclose how much of their assets are invested in UK equity as compared to overseas businesses. 

Building on the Mansion House reforms and the Autumn Statement, this new proposal aims to support the government's objective of increasing scheme's contributions to productive finance, improving outcomes for members through "value for money" requirements, and consolidating the pensions market.

Under the plans, by 2027:  

  • DC pension funds across the market will disclose their levels of investment in British businesses, as well as their costs and net investment returns. 
  • Pension funds will be required to publicly compare their performance data against competitor schemes, including at least two schemes managing at least £10 billion in assets. 
  • Schemes performing poorly for savers won’t be allowed to take on new business from employers, with The Pensions Regulator (TPR) and Financial Conduct Authority (FCA) having a full range of intervention powers. 

It's hoped that disclosure of investment information will drive up standards, force the consolidation of underperforming schemes, and enable employers and scheme members to make informed decisions about where to invest for their future retirement income. 

The proposals come ahead of the Spring Budget this Wednesday and are subject to FCA consultation. TPR appears to support the plans, noting the importance of ensuring that members receive value for money on their pensions savings. Commenting on the proposals, TPR chief executive said: "With more disclosure helping to spark competition between schemes, and enhanced powers to crack down on poor performers, we can really deliver for savers, now and in the future.”

However, former Pensions Minister Sir Steve Webb (now a partner at consultancy firm LCP) has expressed concerns that the measures run the risk of causing the whole pensions industry to become risk averse. Quoted in Professional Pensions , he noted that "Sometimes it is necessary to take investment risk to achieve the best returns but those risks don't always come good. The penalty for being an outlier will be so great that this new approach could rein in the top performers as well as challenging the under-performers.”

In the same article, Alison Leslie, Head of DC Investment at Hymans Robertson, also notes that there may be a degree of friction between an obligation to invest in UK equity and the obligation to consider asset allocation and diversification and risk management. She said: “If the investment case stacks up recommendations will be made to invest in the UK. Many argue however that the case for significant investment in the UK does not currently exist.”

Further information may follow in the Spring Budget. In the meantime, if you have any questions about DC investment requirements, please do get in touch with Susannah Young (burges-salmon.com) or your usual contact in the Burges Salmon Pensions team.