This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.

Freshfields Risk & Compliance

| 9 minutes read

Unlocking the potential of pension schemes as investors in growth – the Chancellor’s Mansion House speech

For some time, Government figures have increasingly been raising the role of pension schemes as investors in connection with the wider agenda of revitalising the UK capital markets and unlocking investment in growth sectors and infrastructure in the UK.

This dual focus on the role of investors and on the workings of the market was reflected in the Chancellor’s Mansion House speech on 10 July in which, as well as announcing changes to the rules governing capital markets, he unveiled a wide range of proposed reforms to pension scheme regulation, as well as launching processes for consultation and calls for evidence in multiple areas indicating that further change is on the way.

Consolidation of pension schemes – and an increased focus on the investment skills of scheme trustees

The proposed reforms are wide in scope, affecting both defined contribution (DC) and defined benefit (DB) pension schemes, with a particular emphasis on DC schemes. The Chancellor said that the Government’s reform plans will be guided by ‘three golden rules’:

  • securing the best possible outcome for pension savers;
  • prioritising a strong and diversified gilt market to deliver an evolutionary, rather than revolutionary, change in the pensions market; and
  • strengthening the UK’s position as a leading financial centre to create wealth and fund public services.

A consistent theme in the Chancellor’s speech was the need for scale in order for schemes to take advantage of a wider range of investment opportunities. As a result, while the proposals for DC and DB schemes were mostly different, in both cases the Government is clearly aiming to encourage the consolidation of pension schemes and reduce what it sees as the fragmentation of the pension scheme market.

An enhanced role for pension schemes as investors brings with it an increased focus on the capabilities of occupational pension scheme trustees, who are not subject to the requirements of the Financial Services and Markets Act 2000. The Mansion House proposals include a call for evidence regarding the skills, capabilities, and culture of both DC and DB occupational pension scheme trustees in the UK. The Government says that through this call for evidence, it hopes to better understand the knowledge and skills of trustees and whether they have the capacity to consider the full breadth of investment opportunities open to them.

While no specific legislative changes are currently proposed in this area, the call for evidence raises the question of whether the Government would want to explore measures such as mandatory accreditation or minimum skills requirements. This consultation is set to close on 5 September 2023.

Proposals for DC pension schemes 

Following the introduction of pensions auto-enrolment, which spurred rapid growth in the overall size of the DC pension market in the UK, the Government initially focused on DC scheme issues from the perspective of member and consumer outcomes. Legislative changes reflecting this focus included the introduction of charge caps for default funds and, in occupational DC schemes, increased governance and disclosure requirements. But in more recent years, while outcomes for members have remained at the forefront of discussion, the focus has also been broadened to include the macroeconomic role of DC schemes as investors and ways in which the investment opportunities open to DC schemes could be broadened, to include venture capital and growth equity funds in particular.

This broader focus was reflected in the prominence given to DC pension schemes in the Patient Capital Review in 2017, the British Business Bank /Oliver Wyman study of The Future of Defined Contribution Pensions in September 2019  and the work done by the Investment Association, the Financial Conduct Authority (FCA) and the Government in developing the Long-Term Asset Fund as a category of authorised investment vehicle in 2021.

In the months leading up to the Mansion House announcements, the most notable Government initiatives were:

  • The launch of the January 2023 joint consultation by the government, the FCA and the Pensions Regulator (TPR) on a ‘Value for Money (VFM) Framework’, aimed at developing key metrics, standards, and data disclosures for DC pensions schemes to enable their performance to be compared with each other. The joint consultation closed on 27 March 2023. 
  • The changes to the charge cap regime for DC default funds, which took effect in March 2023 and will remove the cap from investment manager performance fees that meet certain conditions, with the aim of enabling DC schemes to seek higher returns and not be deterred from investing in venture and growth equity. These changes follow an extensive series of consultations and policy proposals focused on improving DC scheme outcomes that have been conducted by the Government over the course of 2021 and 2022 (see here, here, here, here and here).
  • The launch of the Long-term Investment for Technology and Science (LIFTS) initiative in April 2023, aimed at increasing UK institutional investment in venture capital and growth equity, with the comparison being drawn in the LIFTS paper to the higher weighting in venture capital and growth equity of pension schemes in Australia and Canada. The paper outlined several broad approaches to achieving these goals, focused on forms of co-investment and information sharing, including taking advantage of the investment capabilities and expertise of the British Business Bank and its venture capital subsidiary British Patient Capital. The Government asked participants in the investment market to give feedback on those approaches and to make concrete proposals to put one or more of them into effect, offering to make an initial £250 million financial commitment to the most promising proposals.

Building on these initiatives, in the Mansion House speech the Chancellor announced:

  • the ‘Mansion House Compact’, an agreement between the nine largest DC funds in the UK to allocate at least 5% of their default funds to unlisted entities by 2030, predicting that effective investment by DC schemes will increase the overall value of pension savings by up to 12% and unlock £50 billion of additional investment by 2030; and
  • that he has asked the British Business Bank to explore opportunities for itself and the Government to play a greater role in establishing efficient and effective investment vehicles to capitalise on the resources unlocked by the proposed reforms.

The Chancellor and the DWP also announced a range of initiatives which are aimed at pension schemes themselves. These indicate that significant regulatory changes may be in the pipeline, which are clearly intended to further the goals of scheme consolidation and of improving the running of DC schemes in particular:

  • The Government’s response to the consultation on the VFM Framework. In it, the Government not only adopts key principles for a regime under which DC schemes can be assessed by reference to a common set of VFM criteria, including investment performance and costs and charges. It is also explicit that the VFM Framework should be a roadmap for consolidation, with TPR and the FCA being given powers to require improvements by underperforming schemes which will otherwise be required to wind up and consolidate if this is in members’ best interests. No details are given about these proposed new powers, which will no doubt be the subject of further consultation in the months to come.
  • A DWP consultation paper on a proposed statutory regime for certain pension schemes to be authorised to act as default consolidators for deferred small DC pots. Such schemes (which the Government says would include authorised master trusts) are likely to be subject to additional regulatory governance requirements. The Government has chosen this as its preferred approach to addressing the issue of small pots over the “pot follows member” concept that has also been under consideration in recent years. The DWP’s consultation on this proposed regime is set to close on 5 September 2023.
  • The Government’s response to its consultation on extending the regime for collective defined contribution (CDC) pension schemes, which are funded by fixed rate contributions from employers and members, but which can provide members with target benefit income streams similar to defined benefit pensions with flexibility to reduce benefits in response to reduced funding levels. A regime for CDCs went live in August 2022, but they were only permitted for use by single or connected employers. The Government has now confirmed that CDCs will be permitted for use by multiple unrelated employers, opening the way for them to be used as industry-wide arrangements or to be provided through master trusts. One potential effect of this will be to allow very large CDC schemes to develop, taking advantage of the benefits of scale.
  • A DWP consultation paper setting out proposals to support individuals in DC decumulation, the process of converting pension savings into retirement income. The aim is to establish a broad alignment in the service offering among different providers where every pension scheme, either directly or through a partnering arrangement, provides decumulation solutions for their members. The proposal is therefore to introduce duties on pension scheme trustees to consider the needs of their members when they want to access their pension pot and develop ways to deliver those needs. The DWP's consultation on this process is set to close on 5 September 2023. 

Proposals for defined benefit pension schemes 

The Chancellor also announced measures in relation to DB pension schemes, all with a strong emphasis on consolidation:

  • Plans to introduce a permanent superfund regulatory regime to assist employers and DB scheme trustees with managing DB scheme liabilities and increase the overall usage of superfunds in the UK. Superfunds are occupational pension schemes that are set up to provide an alternative to insurance buy-outs, able to receive transfers of assets and liabilities from conventional defined benefit occupational pension schemes, allowing transferring trustees and employer sponsors to be discharged from liability. The Government sees superfunds as a way to encourage consolidation of DB pension schemes, and capable of taking advantage of opportunities to invest in productive growth assets.

Superfunds currently operate under a non-statutory interim regime of guidance that was put in place by TPR (after a long gestation period) in June 2020, with plans to develop a statutory regime shelved by the DWP in 2021. To date, only one superfund (Clara-Pensions) has been “authorised” to operate by TPR. It remains to be seen whether the long-delayed development of a statutory regime will be beneficial to superfunds and enable them to transact in volume.

  • A consultation on accelerating the consolidation of England and Wales Local Government Pension Scheme (LGPS) funds, which account for approximately £364 billion of assets in total, through greater use of asset pooling. In conjunction with this, the Government proposes approximately doubling LGPS funds’ investment in private equity from just under 5% of assets to 10%. The Government's consultation on this consolidation process is set to close on 2 October 2023.
  • A call for evidence on factors which may deter DB schemes from investing in growth assets. The questions in the call for evidence are wide-ranging, covering such matters as the rules relating to use of DB schemes’ surpluses, the tax treatment of surplus refunds and the effect of greater consolidation on asset allocation. The consultation is set to close on 5 September 2023.

One eye-catching idea which the Government floats in the call for evidence, in parallel with its encouragement of the emergence of superfunds, is whether a “public sector consolidator”, which may be a form of Government-operated superfund, could have a beneficial impact. The PPF is mentioned in the call for evidence as a body which has the capability to operate a consolidator fund, and evidence is being sought on whether the PPF’s remit could be expanded in this way. It is not clear whether such a public consolidator would be a separate fund from the existing PPF, albeit operated by the PPF Board, or whether the existing PPF would be used in this way.

While the call for evidence acknowledges that the increasing maturity of DB schemes is driving moves to reduce investment risk and volatility, it does not address the question of whether key elements of the emerging new regime for DB pension scheme funding may be exacerbating the situation. TPR’s new Defined Benefit Funding Code of Practice, expected to come into effect in spring 2024, pushes defined benefit schemes more in the direction of reducing risk. Of even more concern in this respect is that the DWP proposed, in the consultation draft of the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations published in July 2022, that defined benefit pension schemes would be legally required to have a long-term investment objective which, in effect, will mean that DB schemes will move away from equities and other growth investments as they become more mature. It is not yet clear whether the Government will put those regulations into effect in the form in which they were originally proposed, or whether the Chancellor’s speech will mark a change in direction on this aspect of DB pension scheme regulation, with more flexibility being retained on such schemes’ investment strategies.


pensions, pension reform, defined benefit pension schemes, defined contribution benefit schemes, tpr, dwp