Key items for your agenda in 2024
Our standout items
UK defined contribution pensions and venture capital compacts
What’s happening?
The ‘Mansion House Compact‘, signed by various pension providers, sets out the aim of increasing unlisted investment by their defined contribution default funds to 5%.
The BVCA has launched the ‘Venture Capital Investment Compact‘. This agreement, signed by many UK venture capital and growth equity firms and with government support, is intended to make it easier for the signatories of the Mansion House Compact to hit their 5% targets.
So what?
The aim is to reach the 5% level by 2030. The extent to which this is a significant change for a pension provider will depend on their current investment allocation, but the Government estimates that reaching the 5% level could unlock up to £50 billion of investment in high growth companies by 2030 in the (unlikely) event that all UK DC pension schemes were to follow suit.
Interestingly, the Compact does not include any geographical restrictions, so the investment does not have to be in the UK.
Signatories of the Venture Capital Investment Compact and the BVCA will progress their commitments over the next 12 months.
UK Local Government Pension Scheme (LGPS) investment
What’s happening?
The UK Government has confirmed its plans for increasing LGPS (England and Wales) funds’ investment in private equity, and for more pooling of assets.
To this end, the LGPS guidance will be revised to increase private equity allocation ambitions to 10% of AuM, and regulations will be amended to require LGPS funds to set a plan to invest up to 5% of AuM in “levelling-up” in the UK.
LGPS funds have been consolidating liquid investments into eight asset pools in recent years, but the Government is looking for more action. Ultimately, the Government wants to see even fewer pools, with each exceeding £50 billion of AuM.
So what?
Guidance will set out the private equity allocation ambitions (which the Government says will unlock £30 billion by 2030) and levelling-up expectations, and should specify the timings.
The asset pooling deadline has been accelerated to 31 March 2025. The Government expects economies of scale to deliver substantial benefits and cost savings.
Other things to keep a close eye on
EU Solvency II reform
What’s happening?
Reforms to EU Solvency II legislation are expected – the aim is to make it easier for insurers to invest in long-term equity investments. The full detail is not yet known.
What does this mean for me?
These reforms are likely to come into effect in the next year or the year after.
If adopted, insurers may be able to invest in a broader range of investments, including private equity and infrastructure funds.
UK defined benefit scheme funding and investment
What’s happening?
Long-awaited new rules for UK DB pension scheme funding and investment are expected to take effect in 2024. The original proposals focused on benefit security for members, generally meaning more insured buy-ins/outs or investment in gilts and corporate bonds. But the Government’s ‘Mansion House’ proposals for enlisting pension schemes in the quest for economic growth are expected to mean that schemes will now have broader scope for investment in productive assets.
The Government also intends to encourage well-funded schemes to run on, rather than transferring risks to an insurer, by relaxing restrictions and reducing the tax rate on refunds of surplus funding to employers. The Government has indicated that the tax charge will be reduced from 35% to 25% from 6 April 2024.
The Government will also propose the establishment of a public consolidator, to be run by the Pension Protection Fund, into which eligible schemes unattractive to insurers and commercial consolidators can transfer.
What does this mean for me?
The latest indication is that the new funding and investment regime will be in force for valuations with effective dates from autumn 2024. We await the final details and will keep you updated.
If schemes that can transfer risk are incentivised to run on instead, this should mean greater investment in equities, including unlisted equities, and illiquid assets than under the current trend. Making pension scheme funding surpluses easier for employers to take out of the scheme, and with lower taxation, should reduce the disincentives to fund the scheme well and run it on rather than transferring the risk to an insurer.
The Government considers that a professionally managed public consolidator will invest in a broader range of assets than is done by the small schemes it will be designed to accept. It intends to set this up by 2026 (that said, a Labour government is expected to conduct its own review of how pension fund investment can help with economic growth).
Change continues apace in the pensions world. Defined benefit pension schemes are focusing more on their journey plans which may involve transacting with insurance companies and new rules will influence future funding negotiations. There is considerable innovation in defined contribution pension provision. ESG and illiquid investments create interesting options for pension schemes. 2024 looks set to be an exciting time in the pensions space.
David James
Partner
UK DC pension scheme consolidation
What’s happening?
The UK Government wants to see very significant consolidation of DC pension schemes. Various existing initiatives are designed to put pressure on smaller schemes to improve value and outcomes for members and also improve trustees’ understanding of investment options. Forthcoming expanded value for money assessment and reporting requirements will apply to larger schemes too.
Schemes will be required to design and offer a range of options for members to ‘decumulate’ their defined contribution pension pot at retirement. Ultimately, the Government would like this to include an offering of ‘collective DC’, under which a level of annual pension is targeted but not promised.
New Pensions Regulator guidance will also help pension scheme trustees to understand the full range of investment options open to them.
So what?
The ever-increasing compliance burden has already led many employers to close their DC pension scheme and enrol employees in a master trust instead. No doubt this trend will continue.
The Government considers that having a small number of very large DC pension schemes will lead to investing more productively, including in private markets, and better outcomes for members.
Offering collective DC as a retirement option is not currently permitted but this is likely to change. The Government is keen on collective DC because it expects member outcomes to be better and, in contrast with insurers offering annuities, collective DC providers are much more likely to invest in productive finance, such as equities and illiquid assets.
No timescales have been given at this stage.
New UK investment vehicles for pension schemes
What’s happening?
The UK Government has announced that a new ‘Growth Fund’ will be established within the British Business Bank, “to give pension schemes access to opportunities in the UK’s most promising businesses.” In addition, pension schemes will be able to invest specifically in UK science and technology companies via the Long-term Investment for Technology and Science (LIFTS) initiative.
So what?
No timescale has been indicated.
We await further details, but the new Growth Fund investment option could appeal to many DC scheme members.
