Pensions and growth

‘Pensions and Growth’, ‘Productive Finance’, ‘Private Market Investment’ – however you refer to it, over the last year we have seen the government ramp up its call for pension schemes to play a bigger role in providing additional capital to support growth in the UK economy.

In the ‘Mansion House Reforms’ on 10 July, the Chancellor outlined the government’s key objective to enable greater investment in illiquid assets to achieve both growth in the UK economy and greater returns for pension savers. It was a comprehensive package which we have been actively involved in responding to.

What has the PLSA done?

The Pensions and Growth agenda has been a key priority for us over the last year, and we have engaged with many government initiatives to remove barriers preventing schemes investing in growth-orientated assets. In June, we published our Pensions and Growth report, A paper by the PLSA on supporting pension scheme investment in UK growth. With many suggesting rapid and radical consolidation as the best way to achieve additional investment, our paper highlighted that there are, in fact, many other things that can be done.

Throughout our work on pensions and growth, we have been committed to ensuring the voice of our members has been heard across government,

While we recognise the benefits of consolidation, providing it is done in the right way, we wanted to demonstrate the range of opportunities for making an impact more quickly. This included measures ranging from introducing fiscal incentives and increasing policy certainty to tackling issues in the automatic enrolment (AE) market, increasing AE contributions, and ensuring adequate LGPS resourcing.

Since the publication of our report in June, the landscape has developed significantly. The Chancellor’s Mansion House speech announced an ambitious package of proposals in the form of several consultation responses as well as a raft of new consultations for the pensions industry to consider. We have responded to the following five Mansion House consultations:

1. Options for Defined Benefit Schemes
2. LGPS ‘Next steps on investment’
3. Ending the proliferation of deferred small pots
4. Pension trustees’ skills, capability and culture
5. Helping savers understand their pension choices.

The proposals set out in our responses involved extensive member engagement. We ran a policy insights webinar, which attracted around 150 member responses to two detailed member surveys and, through roundtables with the British Business Bank (BBB), helped members to build their understanding of how they can develop and find suitable UK growth investment opportunities.

Throughout our work on Pensions and Growth, we have been committed to ensuring the voice of our members has been heard across government. We have regularly engaged with the regulators and the Office for Investment, as well as influencing the Department for Work and Pensions (DWP) and HM Treasury through several meetings with the Minister for Pensions and the Chancellor. We not only attended each of the three main party conferences, but we also hosted and took part in roundtable events.

Where do we stand?

In his Mansion House speech, the Chancellor announced the ‘Mansion House compact’, an agreement signed initially by nine of the UK’s largest DC pension providers committing them to allocating at least 5% of their assets to unlisted equities by 2030. Since July, Aon and Cushon have joined, meaning there are now 11 signatories. We support this, and in addition have developed our position in relation to what we want to see the government do to encourage pension funds to invest in UK growth. Our Autumn Statement representation called on the government to:

There are positives and negatives to take from the Autumn Statement.

• Ensure there is a stream of high-quality investment assets
• Amend DB regulations to allow for greater flexibility over investments
• Introduce fiscal incentives, like dividend tax relief, to make UK investment more attractive
• Adopt primary legislation to establish a regime for the growth of DB superfunds
• Reform the automatic enrolment DC market so there is less focus on cost and more on performance
• Increase auto-enrolment pensions contributions from 8% to 12% to increase the flow of assets into pensions.

The Chancellor’s Autumn Statement contained 110 growth measures with pensions reforms aimed at driving forward growth in the economy. Most notably for the pensions and growth agenda, we saw a series of announcements that supported some of our key asks, including:

• Pipeline of assets: Following positive feedback from industry, the government confirmed its intention to establish a growth fund within the BBB. We are pleased to see this progressing.
• DB regulation: The DWP will launch a consultation this winter on the appropriate regime under which surpluses can be repaid, including new mechanisms to protect members, and whether this could incentivise investment by well-funded schemes in assets with higher returns. We were pleased to see that the DWP has made positive revisions to the DB funding regulations which enhance flexibility, especially for open DB schemes. Importantly, it also now clarifies that DB schemes can take appropriate levels of investment risk where supportable by the employer covenant.
• Taxation: The government has pledged to commit £250 million to two successful bidders in the Long-term Investment for Technology and Science (LIFTS) initiative, as well as favourable tax treatment regarding the release of surplus from DB schemes. (The authorised surplus repayment charge will be reduced from 35% to 25% from 6 April 2024.)
• Consolidation: Although the government declared its intention to carry on with the rapid transfer of assets from LGPS pension funds to the asset pools, it has introduced a comply or explain element that should provide some necessary flexibility; similarly, although the government appears to be pressing ahead with using the PPF to act as a DB consolidator, it has listened to concerns that the new fund should be separate and that it should only focus on pensions that are non-commercial for the buyout providers.
• DC market for auto-enrolment schemes: The government has stated that prioritising long-term pension investment performance over low fees is important. TPR will also provide further information for employers on what factors should be assessed when they are selecting a pension scheme.

There were positives and negatives to take from the Autumn Statement. We are encouraged by the commitment to deliver a British growth fund and the proposed reduction in the pension surplus tax. However, we are disappointed that among other things, there were no announcements made to explain how auto-enrolment contributions would be applied from the first pound of earnings and from age 18, in line with government policy. Increasing the flow of assets into pensions is vital to increase the volume of saving in UK shares and other growth assets.

We want to take the opportunity to recognise and thank our members for the hard work that has allowed us to play a leading industry role on this agenda. But of course, there is more to do. The theme of Pensions and Growth isn’t going away. Now that we are in a possible election year, and as we prepare for Spring Budget on 6 March, it is vital that we continue to promote the interests of our members and engage both the government and the opposition.

Our key next steps

1. Look to increase the investment opportunities available for our members, notably through member engagement on the development of the growth fund.
2. Examine further potential tax relief options.
3. Continue to influence consolidation developments across DC, DB and the LGPS.
4. Ensure regulator alignment on rules for implementing the VFM framework.
5. Campaign for the adoption of AE increases as introduced by the Gullis Bill and develop our proposals to raise AE contributions from 8% to 12% over the next decade.