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Pensions Investment Review: A New Era for UK Pension Schemes and Economic Growth

In a significant development for the UK pension sector, the final report of the Pensions Investment Review, launched in July 2024, has been published. It outlines a series of reforms aimed at enhancing the investment potential and efficiency of pension schemes. This initiative is set to have a profound impact on both pension savers and the broader UK economy.

Tackling Fragmentation and Boosting Investment

One of the primary objectives of the Pensions Investment Review is to address the fragmentation within the defined contribution workplace pensions market and the Local Government Pension Scheme in England and Wales. The current fragmented landscape results in higher costs and reduced investment opportunities, which can lead to lower returns for savers.

To combat this, the report proposes a major consolidation of the defined contribution workplace pensions market through legislation in the upcoming Pension Schemes Bill.

This consolidation will enable pension schemes to benefit from scale, reducing overall costs and allowing for investment in a wider range of assets. This includes private markets and large infrastructure projects. This approach is inspired by the successful models seen in Australia and Canada, where larger consolidated pension funds have achieved greater investment efficiency and higher returns.

New Investment Targets and Commitments

The government has announced ambitious new targets for pension scheme investments, building on the 2023 Mansion House Compact.

Under the new commitments, the vast majority of the industry will aim to invest 10 percent of their workplace defined contribution default funds in unlisted companies by 2030, with a specific target of 5 percent invested within the UK. This represents a significant increase from the previous 5 percent target and underscores the government’s commitment to leveraging pension funds to support British growth and economic development.

Enhancing Value and Reducing Costs

The reforms also shift the focus of the pensions system from a narrow emphasis on cost to a broader consideration of value.

This change in approach is designed to ensure that pension schemes deliver better outcomes for members while also contributing to the UK’s economic growth. The report includes measures to prevent new default arrangements from being created without regulatory approval. This will reduce the number of default arrangements and promote a more streamlined and efficient market.

Reserve Powers for Broader Asset Investment

To ensure that pension schemes invest in a diverse range of assets, the Pension Schemes Bill will include a reserve power allowing the government to set quantitative baseline targets for investment in private assets.

This provision will help ensure that pension schemes are actively contributing to the UK’s economic growth by investing in productive assets such as venture capital opportunities and infrastructure projects.

The Role of the British Business Bank

In conjunction with these reforms, the British Business Bank has received regulatory approval to deliver the British Growth Partnership.

This initiative will provide UK pension funds and other institutional investors with access to a robust pipeline of UK venture capital opportunities, further aligning pension investments with national economic goals.

Implications for Pension Savers and the Economy

The changes outlined in the Pensions Investment Review are expected to have a positive impact on pension savers. They could potentially increase returns through more efficient and diversified investments.

For the broader economy, these reforms could lead to significant investments in key sectors such as infrastructure and innovation, driving economic growth and job creation.

Surplus Assets and Economic Contribution

Additionally, there is substantial potential for defined benefit pension schemes with surplus assets to contribute to economic growth.

According to PwC’s Low Reliance Index, there is a surplus of £180 billion in the UK’s corporate defined benefit pension schemes. If these surplus assets are deployed beyond their immediate obligations, they could provide a significant boost to infrastructure, innovation, and broader economic initiatives.

However, it is crucial for the government to address the concerns of trustees regarding the long-term funding position and the employer covenant supporting the schemes. This will be essential in ensuring that surplus assets are used effectively and sustainably.

Conclusion

The final report of the Pensions Investment Review marks a significant step forward in the evolution of the UK pension sector.

By consolidating pension schemes, setting ambitious investment targets, and focusing on value rather than just cost, these reforms aim to enhance the investment potential of pension funds and contribute meaningfully to the UK’s economic growth.

As accountants at Cutts and Co, we will be closely monitoring these developments and advising our clients on how to navigate and benefit from these changes in the pension landscape.