A pensions review, promised by Labour during the election campaign, was announced by the government on Saturday to “unlock” capital in defined contribution schemes and the Local Government Pension Scheme for UK growth. A roundtable with industry is taking place on Monday, and further opportunities to provide input are expected.

The review forms the latest attempt to keep private pensions capital in the UK and so it will focus on investments first and foremost. Adequacy will be looked at in a second phase later this year, when the government will “consider further steps to improve pension outcomes and increase investment in UK markets". 

The exercise follows on the heels of a pension schemes bill announced in the King’s Speech on 17 July, and will be led by pensions minister Emma Reynolds, whose role spans the Treasury and Department for Work and Pensions. 
   

 

Reynolds said: “Over the next few months the review will focus on identifying any further actions to drive investment that could be taken forward in the pension schemes bill before then exploring long-term challenges to ensure our pensions system is fit for the future.” 

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The first phase of the new government’s review will continue along the same track as previous reforms, looking at consolidation and investment strategies, including risk appetite. Among others, it will consider if employers can be encouraged to monitor the performance of their staff pension schemes, greater investment by DC and LGPS pension funds in UK assets, and whether the Pensions Regulator could play a greater role in ensuring good returns for DC members. This follows previous hints that TPR could be given powers to consolidate DC schemes. 

TPR has welcomed the pensions review. Chief executive Nausicaa Delfas said the UK's more than 20m pension scheme members deserve the best possible retirement.  

“Pension investment in a diverse range of assets has the potential to improve savers’ outcomes and support economic growth,” she said. 

The review comes with accusations that the pensions industry is failing to achieve high returns on investments. Chancellor Rachel Reeves told the BBC’s Laura Kuenssberg in an interview on Sunday that savers “deserve better than the returns they’re getting on those savings today” and “are being let down by the pensions industry”. 

In 2023, the best performing DC master trust returned 17.3%, while the worst delivered 7.9%, according to consultancy LCP’s latest master trust report. The best performers had high allocations to global equities, which are dominated by US stocks. These returned 22.6% in 2023 for sterling-hedged overseas equities, while the UK equity market returned less than half that at 7.9%, suggesting that investing in the UK would not have been beneficial for savers. 

The £354bn LGPS meanwhile, a DB arrangement, was 107% funded in March 2022. Contribution levels have remained stable.

The review, which Reeves said was part of a “big bang of reforms”, is reminiscent of Boris Johnson’s ‘investment big bang’ of 2021, when he wrote to pension funds to invest in the UK and its long-term assets. 

In late 2020, the Johnson government set up a Productive Finance Working Group to overcome barriers to investing in illiquid assets, especially for DC schemes. This recommended shifting the focus to long-term value for DC members, building scale in the DC market and widening access to less liquid assets. The Financial Conduct Authority, also in the group that was closed last year, created regulations for new Long-Term Asset Funds for DC schemes in 2021 and authorised the first such fund in 2023. 

The last government put further emphasis on these efforts with value for money rules in DC and small pot consolidation. It also set out plans last year to require the LGPS to pool all assets by March 2025, invest 5% in ‘levelling up’ the UK and require them to consider having up to 10% in private equity, as well as forming asset pools of no less than £200bn each by 2040. 

Labour appears to have put on the backburner the previous government’s focus on getting private sector DB to be part of the drive to invest in ‘UK plc’, making run-on more attractive by allowing easier access to DB surplus for companies. A tax cut on return of surplus has already been implemented, while many companies are still looking to ultimately hand the DB liabilities to an insurer.

Industry has reacted positively to the announcement. The Pensions and Lifetime Savings Association's director of policy and advocacy Nigel Peaple welcomed the speed with which the review was line up. 

Pointing out that pension schemes already invest £1tn in the UK economy, he said: "With the right regulatory framework and government action to ensure a healthy pipeline of investible opportunities, we look forward to working with ministers to create a pension system that works for the country and for savers."

Maggie Rodger, co-chair of the Association of Member Nominated Trustees, is pleased to see a focus on returns for DC members and suggested collective DC should be discussed in part 2 of the review.

 

“AMNT looks forward to the next stage of the review and particularly hopes that the possibility for CDC to deliver better returns for members than DC can be a significant part of the discussion," she said.

Noting that the emphasis of the discussion has changed from 'could do better' to 'savers are being let down', Rodger added: "Rather than a series of detailed propositions for comment, it would be good to focus on what a better pensions environment might look like in 10 years and then make changes."

Others in the industry are relieved the review has now been announced, after it was omitted from the King’s Speech. Calum Cooper, who heads up pensions policy innovation at consultancy Hymans Robertson, said investment was “a sound place to start” where it would not cost money to make changes. However, for pension funds to invest, government needs to make opportunities attractive, he stressed. 

Cooper added he takes comfort from the government saying it will look at improving pension outcomes and retirement adequacy in a second phase. 

 

“There’s a big intergenerational gap between those with adequate DB pensions and younger generations on course for inadequate DC pensions incomes,” he said, adding that just one in three DC members are expected to reach the PLSA’s ‘moderate’ retirement living standard. 

 

“There’s also a gender pension gap to be closed; how do we improve the fact that men expect more than 25% higher pensions than women? We hope this second stage of the review considers all these aspects and encourages the industry to think innovatively to find the solutions,” he added. 

  

“We still believe that independent pension review and cross-party consensus would be the best way to solve these knottier problems and help ensure the tough choices are made that last a generation.” 

For now, the pensions review appears to show the government skirting over these requests from the pensions industry. Rather than being conducted by an independent commission to set the long-term path for pensions, which many in the industry, along with the Trades Union Congress, would have welcomed, it is an in-government review. 

Auto-enrolment reforms to increase contributions – something that has long been called for by the Pensions and Lifetime Savings Association, Association of British Insurers and Institute and Faculty of Actuaries as well as the TUC – appear to be relatively low down on the list of priorities as well. Changes to expand auto-enrolment were legislated for last year, but regulations have not been made yet, while increasing minimum contribution levels from the current 8% has not been explicitly mentioned by the government, although the second part of the review leaves room to address this. 

Thorny issues around the state pension – where decisions on compensating women born in the 1950s and when to increase to age 68 are due – have not been touched on by the government to date, nor how it plans to address the 35% gender pensions gap identified by the DWP last year.
 

 

 
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