Chancellor Jeremy Hunt has reiterated that defined contribution pension funds should say how much they invest in the UK and expanded this to local authority schemes, but many have questioned how effective disclosure would be to increase UK investment and whether it would benefit members.

Hoping to kickstart the economy with pensions money, in his Spring Budget speech the chancellor has re-emphasised a plan first announced last weekend whereby DC schemes will be required to disclose their UK equity allocation. This forms part of a new value for money framework which was already being worked on and which focusses on performance – and some have pointed out that schemes investing in UK equities recently might well have been the same as those performing poorly. 
 

 

In his speech on Wednesday, Hunt extended the disclosure requirement for DC schemes to Local Government Pension Scheme funds, from April this year.  

"I remain concerned that other markets, such as Australia, generate better returns for pension savers, with more effective investment strategies and more investment in high quality domestic growth stocks,” he said.  

“So I will introduce new requirements for DC and local government pension funds to disclose publicly their level of international and UK equity investment. And I’ll then consider what further action should be taken if we’re not on a positive trajectory towards international best practice.”  

The ominous reference to “further action” could reopen the heated debate about government mandation of investments which raged in the pensions sector before last summer. The debate ended when Hunt himself reassured investors last June that government cannot direct the private sector on how to invest, only incentivise it. 
 

 

The pensions industry, by now used to threats of mandation, has queried what a disclosure requirement of UK equities would achieve – and whether higher UK exposure would actually benefit scheme members, given the recent performance of the UK stock market.  

“The [Financial Conduct Authority] will be concerned that this disclosure may lead to an expectation that more be invested in UK assets where potentially the investment case for doing so doesn’t stack up,” said Alison Leslie, head of DC investment at consultancy Hymans Robertson, noting that return drivers are the key consideration of asset allocation decisions, along with diversification and risk management. 

“There is a friction here potentially between the ambitions of Mansion House and the FCA’s duty to make sure initiatives protect members and the market framework,” she said.   

Similarly, Renny Biggins, head of retirement at the Investing and Saving Alliance, said greater transparency was welcome but queried if it would drive better outcomes.  

“We should not lose sight that schemes choose their asset allocations based on member demographics,” he said, and that any form of compulsion to direct investment into specific sectors may not be in the best interests of scheme members.  

The change is "only a disclosure requirement – not an actual requirement to invest more in UK equities”, Penny Cogher, partner at law firm Irwin Mitchell, pointed out. 

Unless fiduciary duty, which requires trustees to invest for the best financial outcomes, is updated by parliament to specifically allow broader outcomes, “this new disclosure requirement is not likely to result in any seismic change”, she added. 

Trustees agree that a disclosure requirement will not change how they invest. Adrian Kennett, a professional trustee at Dalriada Trustees, said one can understand the government’s thinking on UK investment, given the reduction in pension funds invested in UK assets over the last 25 years.    

“Will the requirement to disclose UK holdings drive trustees' strategy? I don’t think it materially will.  The desire to optimise returns will outweigh the desire to invest close to home,” he predicted.  

The Pensions and Lifetime Savings Association is supportive of transparency and value for money. Nigel Peaple, director of policy and advocacy, said it “makes sense for the government to introduce incentives - regulatory, fiscal or reporting - that attract DC pension fund money towards UK investments, while also ensuring that investment decisions must be taken in the interest of pension saver”.  

However, he said one way of doing this would be through raising minimum auto-enrolment contributions, and urged government to set out a timetable for this. 

Rob Yuille, who heads up long-term savings at the Association of British Insurers, said that “focussing the pension system on value rather than cost alone will be hugely beneficial for savers”.   

Samuel Coldicutt, associate at lawyers Norton Rose Fulbright, is also sceptical that disclosure by itself will have much of an impact.   

On value for money, the chancellor also mentioned new powers for the Pensions Regulator and the FCA. TPR already has a range of powers available, up to and including winding up a scheme. Coldicutt therefore thinks that the legal threshold for exercising those powers could be lowered.  

“But the government’s plans are not clear and we will really need to watch this space. Generally speaking, it looks as though the government is taking inspiration from the Australian super model,” he said, where funds need to meet certain performance requirements or risk being shut down. 

Dalriada’s Kennett said the devil will be in the detail but that the proposal is indeed new: “Schemes where investment returns are materially below par will have their ability to take on new employers restricted.  This power is new – previously the power existed only to force the wind-up of schemes and substandard investment performance didn’t trigger that measure.”  

The chancellor’s inclusion of the LGPS in the new requirement to disclose UK versus international equity exposure is not expected to change much about how funds invest.  

“Funds will consider their strategic asset allocation as usual after the next fund valuations in 2025 in England & Wales, but in the meantime, we expect the forthcoming updated annual reporting guidance will lead to increased and more standardised disclosures about UK investments,” said Jo Donnelly, secretary of the LGPS Advisory Board.   

The LGPS Advisory Board secretariat team has worked through the SAB’s Compliance and Reporting Committee to update CIPFA’s 2019 'Preparing the annual report' guidance, and new guidance will be published shortly, Donnelly revealed.  

The new guidance will require funds to provide a supplementary table in their annual report which will summarise their UK asset allocation, including UK equity investment, and provide more clarity on the fund’s progress with pooling. It will apply to LGPS fund annual reports for the 2023-24 year onwards, on a ‘best endeavours' basis for the first reports to be covered by the guidance, which are due to be published by 1 December 2024.  

The LGPS has also been mentioned by the Treasury as a potential investor in children’s homes.  

“We understand that [the Department for Levelling Up, Housing and Communities] will establish a working group to look at barriers and solutions to increasing investment in new children’s homes from the LGPS,” said Donnelly. “We will work with DLUHC to ensure the working group includes appropriate representation and will support it as necessary going forwards.”  

The inclusion of the LGPS in the new disclosure requirement were no surprise for the sector, said Iain Campbell, head of LGPS investment at Hymans Robertson. 

“What has raised some eyebrows, however, is the focus on UK equities. This appears to be another shift in the government's wording around the role they wish UK pension funds to play in supporting the UK economy,” he said.  

Pointing out some confusion over terminology, he said: “Previously, the focus has been on 'venture and growth capital' and 'productive finance', so further clarity will be needed on what exactly will be defined as UK equities, and whether this is just one of a number of UK asset classes that will need to be reported on.” 

He also said any stricter rules around how schemes can invest would reverse the diversification made in recent years and “could well create a challenge to fiduciary duty”.  

Campbell said the mention of LGPS funds as investors in children’s homes were unexpected.  

“Given the purpose of the LGPS and the fiduciary duty of pensions committees, this must be done in a way that stacks up financially for the LGPS - the risk-adjusted returns must be acceptable, and the governance requirements cannot be too burdensome. We must always remember that the LGPS is there to pay benefits, not to make up government spending shortfalls,” he added. 

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