UK chancellor unveils reforms to 'prime' UK pensions to boost growth

The UK chancellor last week in her first Mansion House speech to the City of London announced a series of proposals to "fire up" the financial services sector to drive growth. These included plans to make the UK a global leader in sustainable finance, to reform regulation to make it more dynamic and the financial services sector more competitive, and to reinvigorate capital markets by unlocking private investment through pension funds.

The details of the government's pensions proposals were also released alongside the speech, in the form of the interim report of phase one of its pensions review and two new consultations separately on proposals for major reforms to defined contribution (DC) pensions and on a "fit for the future" vision for the Local Government Pension Scheme (LGPS).

Phase one of the pensions review

The first phase of the government's pensions review, which was launched in July 2024, is focused on developing policy in four areas.

These are "driving scale and consolidation" of DC workplace schemes, tackling "fragmentation and inefficiency" in the LGPS through consolidation and improved governance, achieving "a greater focus on value" and better outcomes for future pensioners "rather than cost", and encouraging "further pension investment into UK assets to boost growth across the country."

The interim report on phase one introduces the consultations on changes to DC pensions and to the LGPS. It explains that the government will release a final report on phase one of the review in spring next year, but is consulting now on possible changes to the law in order to allow it to decide what changes to include in a Pension Schemes Bill in 2025.

For DC schemes, the interim report confirms that there are no "specific recommendations" in relation to investment in the UK economy and infrastructure at this stage. It warns, however, that government is concerned by "evidence that UK pension funds are investing significantly less in the domestic economy than overseas counterparts" and says that the next stage of the review will consider if further interventions are required to ensure that the planned reforms, and "the significant predicted growth in DC and LGPS fund assets over the coming years, are benefitting UK growth".

Major reforms to DC pensions

The consultation considers proposed reforms to DC pensions to deliver scale, accelerate consolidation and drive a focus on value over cost. It states that "the government is clear that the future of the workplace DC market lies in fewer, bigger, better run schemes, with the scale and capability to invest in a wide range of asset classes that can deliver better returns for savers long term and invest in the UK, which benefits savers and their communities".

The consultation suggests changes to default arrangements, to the powers to transfer members without consent and to obligations for employers and their advisers.

Default arrangements

To "remove complexity and fragmentation" from the workplace DC market and "ensure that the vehicles used for automatic enrolment are operating at a large scale", the government proposes to include provisions in the upcoming Pension Schemes Bill to regulate DC default arrangements.

The bill will set a limit on the number of default funds or arrangements in "multi-employer DC schemes" used for automatic enrolment (that is, on those a DC master trust provider or group contract-based scheme provider may operate). It will also set a minimum size for any default arrangement in a "multi-employer DC scheme" used for automatic enrolment (that is, a minimum value of assets under management for any default arrangement used in a DC master trust or contract-based scheme such as a group personal pension plan).

The government recognises that these would be "significant market changes", likely to lead to a reduction in the number of DC master trusts and contract-based DC pension providers. The consultation paper says that providers would need to meet the new requirements "by a date no earlier than 2030" and suggests that smaller master trusts and group personal pension plans that are unlikely to achieve a minimum size of assets under management before 2030 consider consolidating with other schemes.

The government is asking for full feedback, including on numbers and minimum sizes, barriers to the changes, exclusions from the changes and concerns around innovation, competition and systemic risk. Providers will likely want to feed back on the work involved and whether the proposed timescales are achievable.

The consultation paper also asks for views on whether providers should be prevented from charging different fees to different employers for the same default fund and whether the proposed changes could limit multi-employer collective DC schemes' growth. It also seeks views on whether  intervention or regulatory changes might be needed to support transfer and merger activity from single employer trust-based DC schemes that cannot satisfy the planned "value for money" framework and "multi-employer DC schemes" that cannot meet the proposed scale requirements.

The consultation notes that "the benefits of scale start to be realised at around £25 billion" and "real benefits" come into effect when funds reach over £50 billion, including efficiencies of scale, and ability to allocate more funds to asset classes such as infrastructure and private equity, and negotiate lower investment fees.

Only a "small number" of group personal pensions (GPPs) have reached £50 billion in assets under management and no DC master trusts have yet reached this size, although some are likely to soon. In addition, GPPs often have more default arrangements, which "can cause fragmentation in the market and impact the ability…to invest these smaller funds in productive assets".

Power to transfer members without consent

The government also proposes to change the law to allow providers to transfer members of contract-based schemes, such as GPPs, to a different contract-based or trust-based scheme without their consent. At the moment, member consent is needed.

This will help providers of contract-based DC schemes to take action in relation to legacy schemes and to consolidate arrangements in anticipation of the proposed new thresholds for default funds. It will also support the upcoming framework around value for money and the planned legislation to drive the consolidation of deferred small pots.

This new power to transfer members without their consent would be subject to appropriate protections for the member. The Financial Conduct Authority would develop detailed rules on its use.

The consultation paper asks for views on a number of questions, including whether the employer who chose the contract-based scheme that the members are to be transferred out of should have any role in the transfer process and who should pay the costs of the transfer.

New obligations for employers and their advisers

The government also asks for feedback on options to address concerns that some employers place too much emphasis on costs or potential cost savings and not enough on value to members when choosing a DC scheme or master trust.

The options include amending the automatic enrolment legislation to have a duty on employers to consider overall value when selecting a scheme and then to review value for members on a regular basis; for example, every five years.

The other options are to introduce a requirement for employers to nominate an executive with responsibility for ensuring pension schemes deliver good-value retirement outcomes for staff; and to ensure that all of the advice employers might receive on pension scheme selection is regulated by the Financial Conduct Authority.

LGPS pools and ESG

The government is seeking views on its plans to accelerate the pooling of LGPS assets by March 2026, to realise the ambitions for UK investment and growth.

Alongside the speech, the government also released its response to the previous government's consultation on introducing regulation of ESG ratings providers and a new consultation on draft legislation to achieve that change. For all types of pension scheme, this legislation will help to ensure the quality of such ratings.

DB schemes

The previous government had suggested two defined benefit (DB) scheme-related proposals intended to support schemes and their members and to create greater opportunity for DB schemes to invest in the UK economy.

These were proposals to change the law around the use of surplus in ongoing DB schemes to encourage DB schemes in surplus to run on – with the option of investing or continuing to invest in UK illiquid assets – instead of securing benefits with an insurer and to establish a public sector DB consolidator scheme administered by the Pension Protection Fund.

The chancellor did not make any statement in relation to these proposals; although an announcement may follow. Stage one of the government's pensions review relates purely to DC schemes and to the LGPS.

Action needed

The DC scheme and LGPS consultations are open until 16 January 2025.

The "default arrangements" and "power to transfer members without consent" proposals in the DC scheme consultation will have a direct impact on DC master trusts, the providers of contract-based pension schemes such as GPPs and, perhaps, collective DC schemes.

Those changes will also have an indirect effect on employers. If the proposals go ahead in their current form, employers might see significant changes to any DC master trust, GPP or other contract-based arrangement that they have selected for their employees. They might also see providers proposing to transfer scheme members to another arrangement and costs changes.

Employers will also be affected by any decision to introduce new employer duties or board-level responsibility to consider value for members when selecting a new contract-based scheme, such as a GPP, or a DC master trust, or by the introduction of an ongoing duty for an employer to ensure that pension schemes, provide value to members. 

In view of this, employers – as well as DC master trusts and the providers of contract-based DC schemes – might like to respond to the DC consultation.

Osborne Clarke comment

Employers that sponsor their own trust-based DC scheme or section should find that this is out of scope of the proposed changes. However, separate "value for members" requirements have already been introduced for the trustees of DC schemes or sections with assets of less than £100m. In addition, the Pension Schemes Bill will legislate for a wider "value for members" framework.

For some trustees and employers, these changes (or a wider desire to review legacy schemes) will raise the question of consolidating, that is, terminating your DC scheme or section and transferring its members to a DC master trust or other arrangement that can provide better value for members.

If and when the changes and new employer duties that the government is considering are introduced, they will affect any consolidation project and the duties owed by the employer after a project is complete. For consolidation projects that are presently in hand, there is the question of whether the proposed changes will affect the advice given, including in relation to choice of receiving scheme.