Mansion House and pension “megafunds”

The Chancellor, Rachel Reeves, used her inaugural Mansion House speech to outline potentially the most significant pensions reforms for many years. The main focus is on multi-employer DC trust-based pension schemes, contract-based workplace pension schemes and the Local Government Pension Scheme (LGPS). There are no specific proposals for DB schemes or single employer DC trust-based schemes at this stage. In addition, although the proposals refer to multi-employer DC trust-based schemes, the inclusion of multiple references to master trusts leads us to believe that the proposals only relate to DC master trusts (i.e. non-associated multi-employer DC trust-based schemes) and that non-master trust DC multi-employer schemes will not be within scope.

The proposed reforms take forward some of the themes first trailed by the previous government in last year’s Mansion House speech (see our legal update for more details). The details of the proposals are set out in an Interim Report into the government’s Pension Investment Review (that was launched in July 2024) and two consultations that seek the industry’s views. The consultations run until 16 January 2025. This legal update focuses on the proposals in relation to DC schemes.

Megafunds

The consultation on DC schemes, “Unlocking the UK pensions market for growth”, points to the government’s desire to utilise the assets of UK DC schemes to generate growth in the UK economy.

The Chancellor wants UK schemes to invest more productively in the UK. To do this, schemes need to increase in size to be in a position to invest in the type of assets, such as private equity and infrastructure, that she considers will deliver better outcomes for savers and support economic growth. The consolidation of DC pension schemes is proposed in order to achieve scale and create so called “megafunds”.

Achieving scale and consolidation

The Interim Report states that fewer, bigger, better run DC workplace pension schemes will provide better returns for members and boost investment in the UK. This is because larger schemes have greater efficiencies, economies and capability to invest in a wide range of asset classes. To achieve consolidation, the consultation seeks views on the introduction of the following in relation to DC multi-employer schemes:

• Minimum size requirements for default funds.
• Limits on the number of default funds.

The consultation acknowledges these proposals are significant market changes and that there will need to be a lead-in time. Therefore, 2030 is the earliest proposed implementation date.

Without consent contract-based transfers

The current requirement for providers of contract-based DC schemes to get member consent to a transfer to another scheme is seen as a barrier to greater consolidation. The consultation is seeking views on the introduction of contractual overrides without the need for member consent, but with member protections. The intention with this proposal is to allow providers to transfer disengaged members to better performing arrangements, a proposal that aligns with the planned introduction of default consolidation of small deferred DC pots. The mechanism would be developed by the Financial Conduct Authority (given that the proposal relates to contract-based pensions). (A without consent transfer option is already available for DC trust-based schemes.)

Cost vs value

A key objective of the Pensions Investment Review is to promote a focus on value in relation to DC workplace pension schemes rather than their cost. The Interim Report notes that the upcoming new value for money (VFM) framework for DC schemes is intended to address some of the government’s concerns in this area, but the review also considers the role of employers and consultants / advisers.

The consultation asks for views on:

• Creating new duties on employers in relation to considering the overall value (not just the cost) of their chosen automatic enrolment scheme (both at the point of selection and / or on an ongoing basis).
• Establishing a duty on employers to name an executive at board level with responsibility for employee retirement outcomes.
• Regulating the advice that employers receive on selection of their automatic enrolment pension scheme.

UK investment

The Interim Report makes no recommendation in relation to mandating investment in the UK by DC workplace pension schemes. However, it is left open for this to be reconsidered at the next stage of the Pensions Investment Review.

What does this mean for trustees and employers?

It is early days. Although consultation is underway, we anticipate a lot of further work will be required before the government legislates on the reforms and they become a reality. However, given the prominence the government has given to these proposals, legislative changes appear likely. Indeed, the government has said that it may include measures to implement its proposals in the Pension Schemes Bill that is expected next year. This Bill will include various other measures intended to encourage consolidation and the focus on value including the new VFM framework and the introduction of default consolidation of small deferred DC pots.

While the main focus of the proposals is DC master trusts, contract-based workplace schemes and the LGPS, given the government’s clear emphasis on consolidation and facilitating investment in the UK, it will be interesting to see how the outcome of these proposals impacts the government’s policy for DB schemes and non-master trust DC trust-based schemes.

Trustees and employers should continue to monitor developments in this area and consider whether they wish to respond to the consultation.