Bigger is better: Mansion House reforms to drive scale in pensions

Traditionally, summer is a quiet time in the world of pensions legislation and regulation. But this year it feels very busy, with multiple consultations to respond to while balancing packing and unpacking from holidays.

No doubt, this is due to the flurry of both Department for Work and Pensions (DWP) and HM Revenue and Customs activity.

Days before we got the detail of the new tax regime for pensions (which is most definitely not a small tweak for advisers and providers to incorporate before April next year), the chancellor announced the government’s Mansion House reforms.

Even though it’s easy to get bogged down in the detail of this veritable smorgasbord of consultations, it’s worth taking a step back to consider the reforms as a whole.

My take is that the key theme from the Mansion House reforms is: ‘big is best’.

The government wants to encourage investment in UK growth and has formed a compact with nine companies – representing around two thirds of the UK’s DC workplace pensions market – to allocate at least 5% of their default funds to unlisted equities by 2030. As the government hopes the rest of the DC market will follow suit, it makes sense that the bigger the scheme, and the fewer individual schemes there are, the quicker that objective can be achieved.

This, the government argues, is best for the member since it opens up new investment opportunities for them. The chancellor claimed it will boost the average pension pot by 12%, or £1,000 a year, when they reach retirement. A claim that maybe should be taken with a pinch – or handful – of salt.

As well as the headline announcement, the DWP published a host of consultations aimed at both defined contribution and defined benefit schemes. They all fit together to encourage the creation of what the government believes will be bigger and better run pension schemes that invest more in the UK.

For example, one consultation covers building and demonstrating value for money. Workplace pension schemes will have to check, score and then publish their value-for-money rating on a RAG (red, amber, green) basis. If schemes consistently underperform, offering low value for money, then the regulator will expect them to take action or wind up and consolidate. This approach could ‘knock out’ the lower performing and smaller schemes.

The drive for consolidation is also evident in the DWP’s consultation on ending the proliferation of small pots. A by-product of this drive to consolidate small pots is that auto-consolidators – the schemes which will accept small pension pots where the member doesn’t choose a consolidator – will have a steady stream of sticky money coming in. Once again, this will create scale which government hopes will lead to investment in UK PLC.

Also evident throughout the consultations is the government push for collective defined contribution (CDC) schemes. Despite there only being one such scheme at the moment, the DWP appears dedicated to extending these large schemes on a multi-employer basis, as well as pushing it as a decumulation solution trustees should consider offering their pension savers. There is no doubt the DWP sees CDCs playing a big role in the future of pension provision.

Although the DWP definitely consider the occupational pensions market to be its main audience for these consultations and messages, it would be foolish to ignore the wider pensions implications. The direction of travel – which has been dictated by the Chancellor – applies to the occupational market but the practical consequences will no doubt trickle down to the platform and retail markets as well. Whether that be on a macro level of driving greater investment in UK growth, or the micro level of what decumulation options – and support – should be offered to pension savers when they come to access their pensions.

This is not a short-term vision. The government is outlining its medium-term plans for the next five to ten years. And their central design could change pension provision in the UK for ever.