The 2024 Mansion House reforms: from theory to practice

UK pension schemes and insurers are key investors in the UK economy. For example, defined contribution (DC) workplace schemes invest £236bn in the UK, and annuity providers hold about £90bn in UK corporate bonds.

Across the UK, these institutions invest in government debt, in businesses through debt and equity, and in real estate and infrastructure – such as social housing, electric vehicle plants and charging points, windfarms, and restoration of UK forests. 

All these types of investments contribute to UK growth in one form or another, as reflected in the government’s own analysis. Government bonds enable the government to meet day-to-day spending needs as well as longer term capital investment. Corporate bonds help companies expand and invest.

And, most importantly, these investments enable pension providers to deliver for savers, be that in the form of the security of defined benefit pensions and annuities, or the growth potential of DC pension pots. In turn, pensions make savers more financially resilient and therefore support the economy in their role as consumers.

Putting money to work closer to home

The government has indicated that it wants to see pension funds invest more in the UK. One of its proposals to encourage that is by driving up consolidation in the market. The hope is that:

• Larger scale will allow for increased expertise, liquidity, and efficiencies which, crucially, will lower some of the costs.

• Less cost pressures will enable schemes to invest in a broader range of assets, including more illiquid assets that are typically more expensive.

• This more diversified investment will also result in more investment in the UK, supporting domestic businesses and infrastructure projects. 

Each of these elements needs to hold true for this to work – and they can, with the right conditions.

A consolidation conundrum

The first assumption is that greater buying power from scale should provide access to investment opportunities at lower investment fees and a broader range of investment expertise.

At the same time, efficiencies from scale should release some of the cost pressures that schemes face and allow them to focus on long-term value.

Scale clearly increases the buying power but at what level? Is it the buying power of the scheme, the default fund, the platform on which the funds sit, or the asset managers’ fund?

Crucially, while scale could theoretically mean that an individual scheme may be able to increase investment budgets, the market may continue to drive the price down. This is because, ultimately, pension charges are set by the competition dynamics in the market, which includes providers and decision-makers such as trustees and their advisers.

Consolidation cannot by itself change this cost-focused culture. A race to the bottom can happen in a consolidated market as much as in a less consolidated market, not to mention that the DC commercial market, in particular insurer-run group personal pensions, is already well consolidated.

Costs and diversification

The second assumption that needs to hold is that the focus on long-term value will lead to more diversification, and more investment in illiquid assets.

This is indeed very likely. From conversations with many schemes and as evidenced in the ABI’s Mansion House Compact progress report, it is clear that the cost-dominated culture is a key barrier holding back pension schemes’ investment in more illiquid markets.

This culture can be changed by regulatory signals and direction like the Value for Money framework, making employers and advisers accountable for their role in the market. The proposals to tackle the last two in the Department for Work and Pensions’ recent consultation are very welcome.

The third assumption that needs testing is whether greater diversification would mean more investment in UK opportunities.

This is not straightforward either. Increased investment in the UK hinges on the attractiveness of the UK as a place to invest capital.

Central to this is ensuring political and regulatory stability, setting out a positive and realistic economic plan to instil confidence of better risk adjusted returns and encouraging and crowding in private investment.

These are necessary for investing on behalf of DC savers as well as annuity policy holders. In an upcoming paper, the ABI will set out some of the steps the government should take to improve the UK’s attractiveness. 

From assumptions to actions

It is encouraging to see the government’s initial steps to provide certainty and stability, and encourage investment through an industrial strategy, pension and planning reforms and financial instruments such as the National Wealth Fund’s financial guarantees.

To make the UK a more investible destination, the government needs to ensure political and regulatory stability and certainty, including a credible regulatory regime for utilities, for electric vehicles and residential property.

The government should focus on the long-term economic plan and produce sector roadmaps to attract the right investors – at the right time.

Lastly, the government should encourage and crowd-in investments, including exploring co-investments, blended finance models and mechanisms to offset the fees of illiquid private assets in the DC market. 

Maria Busca is a senior policy adviser for long-term savings at the Association of British Insurers.