Mansion House 2024: Reforms to the DC pension market and the LGPS

In her first Mansion House speech last month, the Chancellor set out plans for the creation of “megafunds” (both DC and DB) to “power growth in our economy”. The speech was based on the interim report coming out of the Government's Pension Investment Review, which launched in July 2024.

The initial report covers the review’s first phase and introduced two new consultations:

• Pensions Investment Review: Unlocking the UK pensions market for growth, which proposes measures designed to accelerate and help enable scale and consolidation in the DC market, embodying the Government's view that that the future of workplace DC schemes is in “fewer, bigger, better run schemes” that can “deliver better returns” and “boost investment in the UK”.
• LGPS (England and Wales): Fit for the future, which contains a package of proposed reforms to the structure, investments and governance of the LGPS, intended to tackle “fragmentation and inefficiency” and, again, boost investment in the UK.

Unlocking the UK pensions market for growth

• The Government is proposing a minimum size of £25bn-£50bn for multi-employer schemes including Master Trusts, Group Personal Pension and contract-based arrangements (and a maximum number of default funds per provider), which would apply from no earlier than 2030.
• To remove the “significant barrier to consolidation” posed by the requirement for providers to get individual consents before transferring members to another arrangement, the Government proposes a contractual override, subject to the appropriate protections. Detailed rules on the use of transfers without consent will be developed by the FCA and subject to further consultation.
• The Government's view is that the DC market is operating with an excessive focus on costs which comes at the expense of considering a broader range of metrics of scheme quality and which prevents investment in a broader set of asset classes. The consultation calls for a culture shift towards value, by employers, consultants and advisers.
• Single-employer schemes are excluded from the proposals, as the new Value for Money framework should ensure those schemes achieve value in their own way.

LGPS: Fit for the future

The reforms will pool assets from the 86 separate local government pension schemes in England and Wales, which together form the LGPS. The LGPS represents one of the world’s largest defined-benefit schemes, with 6.5 million members and £360bn in assets.

Pensions Minister Emma Reynolds has said the reforms could unlock £80bn of investment into UK productive asset classes such as critical infrastructure and private equity (the inspiration being arrangements in Australia and Canada where this is commonplace).

In 2015, the former Conservative prime minister David Cameron tried to push local funds into eight larger pools, but to date only around 39% of LGPS assets have been merged into larger funds. Even then, the investment decisions made by those pooled funds did not lead to a material increase in investments in UK infrastructure or UK assets.

Labour’s reforms include plans to have each administering authority specify targets for investment in their local economies. This was not something which accompanied the Conservative policy to create pooled funds. The Treasury claims that a 5% target for local investment could secure £20bn for communities. 

Presumably the Government will need to reconcile the trustee duty to protect members' benefits with the drive to invest in longer term, potentially riskier opportunities (which infrastructure projects often are) which might benefit the Treasury more than they do the members of the LGPS. Those responsible for investment decisions are currently councillors – supported by investment professionals – and their concern (as it has always been) will be:

• The sometimes very public criticism of those investment decisions
• The risk of lower-than-expected returns from those investments
• The possibility of a funding deficit, and
• The need to call on their local authorities and other employers to inject additional funding into the LGPS.

A new independent review process will also be established to ensure each of the 86 administering authorities is ‘fit for purpose.’ 

Next steps

Both of the consultations close on 16 January 2025. Many of the proposals “could lead to fundamental changes which will require primary legislation”, and a decision on whether to include these measures in next year’s Pension Schemes Bill will be made in light of the consultation outcome.

A final report on phase one of the pensions review is due in the spring 2025. It will further consider investment by pension funds in the UK. The scope of phase two “will be published in due course”, but it is expected to consider additional steps to improve pension outcomes, including assessing retirement adequacy.

The Government inherited an ambitious pensions agenda. For instance, we still await the DWP's response to the consultation on use of DB surplus (which was built on a similar intention to "unlock funds for growth" of UK PLC). The Chancellor's Mansion House speech did not provide any update, and she has since required all departments to identify cost savings. Employers will be keen that the surplus proposals do not end up on the cutting room floor, given the magnitude of the changes now being proposed.