The Chancellor has announced the launch of his ‘Mansion House Reforms’, which could see pensions increase by over £1,000 a year in retirement for the average earner who saves over the course of their career.

The reforms by Jeremy Hunt are also said to unlock up to £75bn of additional investment from defined contribution (DC) and local Government pensions, which supports the Prime Minister’s priority of growing the economy and delivering tangible benefits to pension savers.

As the largest pension market in Europe, the UK’s market is worth over £2.5trn. Automatic
enrolment to schemes has helped an extra 10 million people over the last 10 years, with £115bn saved in 2021. However, how this money is invested is limiting returns for savers.

To level the playing field, the Chancellor and the Lord Mayor have supported an agreement between nine of the largest DC pension providers in the UK, committing them to the objective of allocating 5% of assets in the default funds to unlisted equities by 2023.

The providers represent over £400bn in assets and the majority of the UK’s DC workplace pensions market.

As a result of this commitment, £50bn in investment could be unlocked from high growth companies by 2030 if all UK DC pension schemes follow suit. In addition, pension pots could be increased by 12%, or as much as £16,000 for the average earner.

Hunt said: “British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for typical earner over the course of their career.

“This also means more investment in our most promising companies, driving growth in the UK.”

Head of pension savings at Aegon, Kate Smith, added: “If we were ever in any doubt, the Chancellor’s Mansion House speech confirms just how important pensions are to the UK economy.

“The Mansion House Compact is a key step towards encouraging greater investment in private equity by unleashing the superpower of DC pensions. It is critical that this is done in a way that improves member outcomes. Increasing the future value of members’ pensions must be the top priority. It’s right that trustees and others governing pension schemes remain focussed on acting in members’ best interests and this should include considering a wide range of investments, without being overly swayed in any particular direction.

“Clearly the Chancellor is looking at a range of government pension initiatives through a dual lens of improving member outcomes and supporting UK economic growth. We welcome the next steps to support this, especially those around delivering a new cross-pension value for money framework and looking for workable solutions to deal with the growing issue of small frozen pension pots. We look forward to being actively involved in these initiatives.”

Head of retirement policy at AJ Bell, Tom Selby, also said: “The Chancellor is clearly desperate to boost long-term growth in the UK but has no appetite to do so through increased government borrowing. Given that context, it is understandable Hunt has his eyes firmly set on directing a chunk of the UK’s £2.5trn pensions war chest into the UK economy.

“As these proposals are developed, it is vital the interests of savers are paramount in the thinking of the Treasury, regulators and the wider financial services industry. DC and defined benefit (DB) pensions are very different beasts and need to be treated as such, so it is positive the government hasn’t gone down the road of forcing pension schemes to allocate their funds in a certain way. It is also sensible to keep these reforms away from the retail investment world, where illiquid investments are more likely to be problematic.

“The ‘Mansion House Compact’ aim of getting at least 5% of workplace pension default funds invested in unlisted equities by 2030 might be seen as a potential boon for the UK economy, but any such investment needs to be done in the best interests of members. The Neil Woodford scandal exposed some of the challenges big investments in illiquid assets can have and investors will not thank the government if this policy hits the value of their retirements pots.

“It is, of course, possible that an investment approach that embraces a bit more risk over the long-term will ultimately boost member returns – but there are absolutely no guarantees. As such, the Chancellor’s claim that this new approach will boost the average pension pot by 12%, or £1,000 a year, when they reach retirement should be treated with a huge handful of salt.”

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