Following what felt like a relatively benign budget from the perspective of the pensions industry, there has been a collective holding of breath in anticipation of the Chancellor’s maiden Mansion House speech. Trailed over the last few days as the “biggest pension reform in decades”, there’s been a growing sense that, at least where pension schemes are concerned, size matters to the new Government. 

And last night, the Government really nailed its colours to the mast when it comes to the future direction of travel for pension funds in the UK – bigger is very clearly better in its view.  The Interim Report of the initial findings from Phase 1 of the Pensions Review launched in July indicate that funds are more willing and able to invest in a wider range of productive assets once they reach the £25bn-£50bn scale, suggesting an open and shut case for the benefits of large-scale consolidation. But what impact does that increased size have on returns for savers?  Will radical consolidation really generate the win-win outcome for members and UK Plc that the Chancellor and others anticipate? 

Because make no mistake, the changes announced last night and published in the Interim Report are radical.  Mansion House mark II looks to be going further and faster than anything previously proposed when it comes to consolidating both the LGPS and multi-employer DC schemes.  There is much for the industry to wrap its head around over the coming weeks and months in terms of how this consolidation is to be achieved, and the timescales proposed are not for the fainthearted. So, while frustrating for many, this may explain why DB private sector pensions and the hot topic of refunds of surplus was kept off the table…. for now, at least. Whoever said pensions was dull?

Interim Report - overview

The headline points coming out of the interim report were heavily trailed prior to the Mansion House speech but reading the radical proposals in print takes the breath away. Consolidation of both multi-employer DC schemes and LGPS assets (with accompanying consultations on both areas) is targeted within ambitious timescales (a potential target date of 2030 for the consolidation of DC funds, and March 2026 for LGPS funds moving to the new pooling model).  

Minimum levels of UK investment have not yet been mandated, although it will be picked up later under Phase 2 of the Pensions Review. There was also nothing in the Interim Report on DB private sector schemes (other than possible secondary impacts). 

Nevertheless, it is fair to say the pensions industry is going to be awash with activity over the next few years and clarification on how exactly this mass consolidation will be achieved and whether the proposed timescales are realistic will need to be ironed out quickly. But first impressions seem positive in terms of achieving the wider objectives of improving value for money for members and scaling up the investment power of pension funds to boost the UK and local economies.

In amongst the anticipated macro-economic benefits of these changes, though, is a clear need to communicate the potential micro-economic benefits with pension scheme members themselves. The financial sector must not lose sight of the primary function of pension schemes: to provide retirement income for millions of pensions savers across the country. These changes must be communicated carefully and effectively at consumer level to reassure savers about what these proposed changes might mean for them. A quick look through the comments section of any mainstream news outlet reporting on these reforms shows a depth of misunderstanding and mistrust that should not be ignored.  It is imperative that scheme members understand what these changes might mean for them individually: in a world where member engagement is already a challenge, the industry must work hard to make sure members remain emotionally, as well as financially, invested in their retirement savings. 

We look in more detail below at the specifics of some of the proposals set out in the Interim Report. 

Consolidation of LGPS assets 

After weeks of speculation the picture is now much clearer for LGPS funds about what is in store, but many questions remain unanswered.  It is not clear whether the shift away from local decision-making risks LGPS investments becoming more politicised. The focus on investment in local projects and infrastructure seems positive, but there is no mention of mandating investments to mitigate for climate change and other environmental concerns (despite lobbying by leading British actors for greater pensions investment in green assets) although this may yet follow in Phase 2 during which the Government will be considering further investment aspects as mentioned in their interim report.

With the scale of assets under management, it is no surprise to see that the so-called “mega-funds” themselves will be under much greater scrutiny, starting with a compulsory requirement for FCA regulation and oversight.  We are told to expect an “overhaul” of LGPS governance to deliver better value for investment decisions: as a starter for ten many in the industry would like to see implementation of the scheme advisory board’s Good Governance recommendations.

The Interim Report also refers somewhat ominously to a review of the 86 administering authorities in the LGPS to ensure that they are “fit for purpose”. It’s not clear what this will entail or what might be the outcome for those considered to be falling short.  Improved efficiency is clearly at the heart of the Government’s proposals on LGPS mega-funds, and many may be breathing a sigh of relief that the Chancellor has focused only on asset pooling rather than a full merger of the funds themselves, but there might yet be a sting in the tail for those deemed to be underperforming. 

Consolidation of multi-employer DC schemes

Not so much picking up the baton where Jeremy Hunt and the previous Government left off, it seems that Rachel Reeves is hoping now to catapult it forwards when it comes to the consolidation of DC schemes.  Forcing multiple employer DC schemes to consolidate into mega-funds of at least £25bn (although minimum levels of AUM are being consulted on) will radically alter the DC landscape.  

This will undoubtedly create economies of scale and a significant increase in investment power. Value for money for pensions savers is key, and The Pensions Regulator (TPR) has already thrown its support behind the Chancellor’s ‘bold reforms’, which it says will accelerate the move towards a market of fewer, larger DC schemes which are ‘better equipped to deliver for savers and invest in the UK economy’ and will ‘raise standards across the market’. 

But large-scale consolidation and investment has its risks, with too many eggs in too few baskets likely to be a concern, along with the risk of stifling innovation which some smaller funds do so well. The much-lauded Australian and Canadian models are held up as case studies in how well so-called ‘mega-funds’ can work. And yet, the Ontario pension fund was one of the largest investors in Thames Water, and was forced to write off $1bn from its investment after the utility company was fined $175m for sewage discharge. 

There are also risks around the quality of decision-making, with fewer organisations (and fewer individuals within those organisations) making key investment decisions which will affect millions of individual savers, and in particular the vast majority of savers who participate in automatic enrolment default funds. TPR has rightly emphasised the importance of EDI within governing bodies, noting the impact it has on the robustness and effectiveness of the decision-making process. Steps should be taken to make sure that EDI issues are taken into account by those responsible for managing so-called ‘mega-funds’.

And at the heart of any pension scheme is the members themselves.  Whilst the Chancellor may point to economies of scale and reduced administrative costs, many savers will today be looking for reassurance that tipping their pots into large funds to facilitate UK growth and investment in infrastructure is really the best way to ensure a comfortable retirement.

Value for Money

As predicted, the Interim Report confirmed the Value for Money (VFM) framework for DC schemes will be included in the Pension Schemes Bill 2025, and the consultation Unlocking the UK pensions market for growth asks for evidence on VFM measures. As the VFM initiative has been underway for some time there are no major surprises under this part of the consultation, but as Value for Money and Value for Members clearly underpins all the other measures set out in the Interim Report, it is a key objective for the Government in Phase 1 of the Pensions Review and will continue to be in Phase 2. The interim report noted that the Government had considered placing a duty on employers to consider value at scheme selection decisions or at regular intervals and whilst it was not being taken forward in this set of proposals it is still under consideration and may be taken forward at a later stage.

UK Investment

It was widely anticipated that the Chancellor might announce some form of mandatory minimum for investing in UK assets, but no such announcement came (other than a requirement for LGPS funds to propose local investments as part of their investment strategy). Don’t get too comfortable though: the Government has said it will be reviewing this in Phase 2 of the Pensions Review, so the industry is not off the hook just yet!

Private sector DB Schemes and surplus assets

Notably left off the menu at the Mansion House dinner were private DB schemes and the potential to use surplus assets productively. This will disappoint many across the industry: after heightened calls for the Chancellor to address the point, the omission is likely to be seen as yet another missed opportunity for the Government to unlock DB pension surpluses.  

With an increasing number of DB schemes in surplus, the industry has been pushing for the Government to make it easier for schemes to free up excess assets for the benefit of both the scheme sponsor and scheme members. Doing so feels like a straightforward win-win for everyone: the Government would benefit from the tax levied on employer surplus payments, sponsors could re-invest the cash back into the UK economy, and members’ benefits could be enhanced. Viewed that way you could be forgiven for feeling perplexed as to why the Government is yet to re-ignite the previous consultation on this. But perhaps this is one for another day… it’s not as though there is a shortage of issues keeping DB schemes (and the wider pensions industry) busy (Section 37, anyone?). 

This article was written by Mairi Carlin, Louise Pettit and Amy Davies