How Mansion House Reforms may impact DB and DC pensions

The Chancellor has launched the ‘Mansion House Reforms’, aimed at increasing pensions by over a £1,000 a year in retirement for average earners saving over the course of their careers. Our pension experts weigh in on how these changes may impact DC and DB schemes.

According to the Treasury, the Mansion House Reforms intend to boost pensions while increasing investment in British businesses, including the potential of unlocking an additional £75 billion for ‘high growth’ businesses.

In what has been named the ‘Mansion House Compact’, some of the UK’s largest DC pension schemes have agreed to commit 5% of their default funds to unquoted equities by 2030. The Chancellor believes these schemes may see an increase to a typical earner’s pension pot by 12% over the course of a career, while other changes could increase pension pots by as much as £16,000.

Impact on DC pensions

Martin Willis, Partner at Barnett Waddingham, says: “Unquoted equities have the potential to boost member returns, and it is positive that the Chancellor is focused on value for money rather than cost in a vacuum. Consolidation of DC assets will open doors to better value for members, not just in terms of investment strategies but also in wider functionality such as options for taking benefits in retirement.

“However, we are talking about people’s money here, and extreme care must be taken. Unquoted equities bring additional and different risks in exchange for potential return. It is critical that these initiatives are balanced with trustees being empowered to make the decisions that are best for their members.

“To make the best decisions, trustees must have freedom of choice; this includes being able to invest in a broad range of assets. While this might include Jeremy Hunt’s preferred equities which will boost the UK economy, it must also include a focus on global investment opportunities to maximise value, as we see working well in Australia.”

Impact on DB pensions

Richard Gibson, Partner at Barnett Waddingham, says: “By far the biggest prize in the Chancellor’s new drive to get assets working for the UK economy is the nearly £1.5trillion locked up in private sector DB pension schemes. The near-term focus is on DC, but the Government is correct that bringing small DB pension schemes together could deliver economies of scale and improve asset returns.

“Many pension schemes are already realising these benefits – along with long-term security – by transitioning to the insurance buy-out market. Because of the great reversion to long-term interest rates last year, hundreds of billions of pounds of DB assets will be transferred to buy-out insurers over the rest of this decade. If the Chancellor really wants to plan ahead, he will look at how insurers can use that capital for long-term infrastructure.

“One real concern is that politicians are looking to the Pension Protection Fund to deliver consolidation when there are already viable offerings in the private sector. It is likely that the government is interested in using the PPF because it has a strong record for efficient high volume administration, robust governance, and because it has money. But it will be a challenge to extend the PPF’s approach to the complexity of 5,000 DB schemes. More importantly, the PPF has built up its capital from a levy on UK businesses at risk of insolvency, and the government now suggests risking that capital for another purpose entirely.”

For professional use only. The above is for information purposes only and should not be construed as investment/regulated advice. Please contact your Barnett Waddingham consultant if you would like to discuss any of the above topics in more detail.