There were other areas that many were hoping might be progressed via the speech, which did not feature:

Defined benefit (DB) pension reforms (see our commentary on a key consultation, here)

• Surplus extraction – clarification on which is crucial to the endgame / run-on debate
• Somewhat related to this, the possibility of a 100% PPF guarantee
• A small scheme (potentially PPF-run) public consolidator

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​​​​​Innovation in the retirement provision space, whether that be

• An update on multi-employee collective defined contribution (CDC) schemes – admittedly there is an ongoing consultation closing on 19th November
• Decumulation CDC schemes – although, the Government has previously suggested this will be looked at in part two of the Pensions Review
• Alternative solutions and regulation – bridging the gap between DC and DB and even the insurance and pensions (TPR / PRA) worlds (especially now that residual pension pots fall within estates for inheritance tax purposes, arguably encouraging spending)
• At some point, with an ageing population, the state pension model could need revision, taking lessons from overseas... although not many would have been expecting that in this speech!

The search for scale is based on learnings from the Australian and Canadian pension systems in particular, with the aim of providing numerous benefits and efficiencies. As schemes reach £25bn to £50bn, the Government notes, evidence suggests that they begin to benefit from:

• Greater expertise and increased ability to hire skilled staff
• Diversification of investments
• Ability to negotiate lower fees
• In-house management
• Direct investment
• Ability to make meaningful investment in productive finance

Currently, the Chancellor suggests, the lack of ability for UK pension schemes to invest at the scale required sees “Canadian teachers and Australian professors” benefitting from UK productive assets. The Government wants more productive investment, and for this to benefit “British savers”.

However, in its interim response, the Government does acknowledge the challenges that come with consolidation and concentration.

In addition, it is worth noting that it’s easy to look overseas with rose-tinted glasses. Undoubtedly there are many benefits to the Australian and Canadian systems, but we should also be aware of risks. For example, in its latest Global Financial Stability Report, the IMF has recently shown some concern about the level of liquidity mismatch growing in large superannuation funds, such as those in Australia, with increasing allocations to illiquid asset classes.

Pooling is nothing new. It was introduced in 2015 by the then-Chancellor George Osborne, with a target of six pools, each of at least £25bn (see the original guidance, here). Since then, eight pools have been established.

In the 2023 Mansion House speech and subsequent Autumn Statement, the ex-Chancellor Jeremy Hunt stated that by March 2025 all LGPS assets should be in LGPS asset pools greater than £50bn by 2030 and greater than £200bn by 2040.

In fact, of the c.£390bn assets within the LGPS, c.£280bn is already within the eight pools[1].

What the Chancellor is doing differently now, is (subject to the consultation) looking to legislate for the pooling of all LGPS assets by March 2026. These pools will be fully-fledged investment managers, regulated by the FCA and, interestingly, be the principle investment advisers.

In addition, whilst not explicitly being mandated, there does appear to be increased emphasis on in-house management and direct investment. Currently, many of the pooled assets are, in fact, delegated to sub-investment managers.

Existing investment consultants and external managers may not fare too well from the proposed changes…

It is also worth noting that, at least within the LGPS, appetite for growth assets itself does not appear to be a hurdle to productive investment. This is perhaps more a question of doing growth better!

LGPS average asset allocation

Source: Scheme Annual Report 2023. NWM charting of underlying data

On that note, with the recent budget, there have been questions regarding prospects for gilts. The drive for productive investment within the LGPS is, itself, unlikely to be detrimental to gilt demand, given the relatively low existing allocations which often simply serve as asset diversification.

Definitions:

• DC master trust (MT) – a trust-based DC scheme accommodating multiple employers
• Group personal pension (GPP) – a workplace contract-based arrangement with a provider selected by the employer

In the speech, The Chancellor again gave a nod to initiatives already underway, such as the 2023 Mansion House Compact, with signatories committing to achieve allocations of at least 5% to unlisted equity for their default DC funds. Note that there have been calls to expand this to include other assets, such as infrastructure.

However, some fairly material proposals for multi-employer DC schemes are outlined in the DC consultation, and it’s not quite as simple as the “megafund” headline might suggest:

• They should have a maximum number of defaults
• Defaults should operate at a minimum size
• The proposal is that these conditions apply at the underlying “entry” fund level
• A default arrangement may consist of a single, or many, default fund(s) (such as a lifestyling fund), which may itself invest across a range of sub funds. Different employers may participate in different default arrangements with the same provider
• £25bn-£50bn appears to be the range being considered for minimum size
•  No guidance has been given on the maximum number yet
• Schemes should look to achieve this by 2030, or consolidate
• The proposals have potential to limit provider flexibility in terms of the range of default funds offered
• DWP is also keen to explore whether such changes warrant the removal of the ability for providers to negotiate different costs with different employers (for the same product), and any knock-on implications – again, arguably not particularly welcome by some providers

As well as productive investment, the first part of the Pensions Review focussed on how costs versus value feature in selecting default arrangements. The interim response showed that the top three factors in selecting an arrangement were ease / convenience, advice (which is heavily influenced by costs) and employer fees. The Government wants to explore possible solutions for increasing focus on value, which could also facilitate investment in a broader set of asset classes. The proposals consider employer duty, executive responsibility, required FCA regulation of advisers and the in-progress development of a Value for Money framework.

On that note, the interim response also proposes a contractual override, such that members of under-performing contract-based schemes can be bulk transferred to another arrangement without requiring their consent. 

Asset origination and distribution will be key. Crucial to both scheme and Government aims, is having investment opportunities across a range of different formats – not all investors have the same preferences.

The National Wealth Fund presents new possibilities here (and the Chancellor cited NWF-backed projects already underway). Strategic partnerships between schemes and banks or other originators could help provide further opportunities still. Of course, such partnerships are also an easy way to achieve many of the benefits of larger investors.

One further observation is that, compared to the 2023 Mansion House speech (which only really mentioned unlisted equity in the context of productive assets), infrastructure and clean energy features more prominently, in-keeping with this Government’s creation of the NWF, Infrastructure Taskforce and National Infrastructure and Service Transformation Authority.

Finally, with regards to DC, there are likely other impediments to productive investment. In particular, we refer to the prevalence within DC of daily liquidity for underlying funds. Tweaks have been made over time to facilitate greater investment in illiquids (such as changes to “permitted links” rules and introduction of Long-Term Asset Funds, or LTAFs), but perhaps more fundamental change is needed within DC, or the gap between DC and DB bridged with further innovation of retirement offerings.

Beyond the LGPS and DC, no further reforms or innovation were announced. We await further developments on DB surplus extraction and CDC…

[1]: Figures taken from the LGPS consultation. For reference, total asset value in the 2023 LGPS annual report is £354bn, and the total AUM of the pools based on latest available annual reports (not all the same date) is c.£270bn.