On 22 November, the Chancellor announced a package of pensions reforms as part of the Autumn Statement, taking forward many of the initiatives announced in his Mansion House speech in July. The latest reforms and proposals are aimed at providing better outcomes for pension members, driving a more consolidated pensions market and enabling pension funds to invest in UK growth and productive assets, especially unlisted assets, ultimately strengthening the UK’s position as a leading financial centre – all driving forces of the Mansion House reforms (see more on the Mansion House reforms here). This blog post summarises the key pensions points from the Autumn Statement.

Focussing on outcomes for pension members

In his speech, the Chancellor reiterated one of the three ‘golden rules’ of the Mansion House reforms – to secure the best possible outcomes for pension savers. The Government is proposing to do this in a variety of different ways.

Ending the proliferation of deferred small pots

For some time, the Government and many in the pensions industry have been considering how to address the issue of ‘small pots’ – the existence of too many small defined contribution (DC) pension accounts, which have arisen as a result of workers moving from job to job and therefore from pension scheme to pension scheme, especially following the introduction of pensions automatic enrolment. In July, the Government published a consultation on a proposed statutory regime for certain pension schemes to be authorised to act as ‘default consolidators’ for small deferred member DC pots – an approach that was favoured over the ‘pot follows member’ concept that had previously been considered.

The Government has now published its response to the consultation, presenting the resolution of the small pots issue as critical to improving efficiency and member returns, noting that it causes annual estimated industry-wide losses of up to £225m and reduces the value for money provided by schemes. The response highlights that both the ‘default consolidator’ and ‘pot follows member’ models have their merits but there was no collective agreement across the responses on the optimal approach. Despite this, because the ‘default consolidator’ approach aligns with the Government’s desire for a more consolidated DC pensions market, it has been chosen as the preferred solution. Therefore, the response sets out a proposed framework which will enable a small number of authorised schemes to act as consolidators for deferred small pots and seeks views from respondents on whether they agree with the proposals. The Government estimates that this will benefit the average pension saver by £700 at retirement.

Longer-term developments for workplace pensions

However, the response to the issue of small pots is not limited to the default consolidator model. The Government links it to broader possibilities for the growth and evolution of the pension industry. For this reason, the response on small pots is set out in a paper titled Looking to the future: greater member security and rebalancing risk, the second part of which is a call for evidence seeking views on a long-term vision for workplace pension saving in the UK, with the aim of exploring two proposals in particular.

One of these is the development, in the longer-term, of a ‘lifetime provider’ model, with each pension saver ‘stapled’ to a ‘pot for life’. The lifetime provider system, in place in Australia and other jurisdictions, builds on the legal right of employees to choose which pension fund their employer should pay contributions to. A lifetime provider model goes a step further by using some form of central infrastructure that retains pensions information for all registered employees, which employers must use to identify what lifetime pension provider an employee uses (or is ‘stapled’ to) and therefore which scheme to pay contributions into (with the employer choosing the fund only if there is no lifetime provider or the employee otherwise makes no choice of fund).

In the call for evidence, the Government seeks to gather views on potential processes to implement this type of system in the UK and suggests utilising a centralised platform as a potential option, building on the pensions dashboard and what will, by then, be a pre-existing database and infrastructure. The Government does acknowledge some of the potential downsides that could result from a lifetime provider system as seen in other jurisdictions, such as reducing employers’ active involvement in employees’ pension savings and discouragement of employers from being more generous than the standard offerings of lifetime providers, which may reflect the auto-enrolment minimum only. Therefore, the Government is seeking comments on issues such as scheme quality and choice of scheme for employees, and how the competitive balance within the industry could be changed.

If the lifetime provider idea were to be taken further, the Government would need to grapple with some formidable issues. These include a low level of engagement with pensions on the part of employees, and consequent inertia which could lead to a lack of competition and hence insufficient improvement in performance benefiting members – especially if employer engagement is reduced at the same time. The most significant issue is the need for significant new infrastructure. While the pensions dashboard system may represent a significant step in this direction, far more would be needed in order to make the ‘pot for life’ work in practice.

The other proposal that is explored in the call for evidence is the expansion of the role of collective defined contribution (CDC) pension schemes, with CDCs being viewed potentially as vehicles to bring more members into accumulation through the existing auto-enrolment system.

CDCs are funded by fixed rate contributions from employers and members, but are designed to provide members with target benefit income streams similar to defined benefit (DB) pensions, with flexibility to reduce benefits in response to reduced funding levels and with risk spread across the different groups of members. The Mansion House reforms included confirmation that regulatory changes would be made to allow CDCs to be used on a larger scale, potentially being provided as industry-wide arrangements or through master trusts. The latest proposals would set the scene for a further expansion of their role. One possibility, discussed below in connection with the Government’s response to the consultation on helping savers to understand their pension choices at the point of retirement, would be a significant role for CDC schemes in the decumulation phase, ie as pension providers. The other possibility is their use by employers for providing auto-enrolment pension benefits. Depending on uptake, this could lead to the development of a significant pool of assets under CDC management.

The Government recognises that a large CDC presence in workplace pensions and auto-enrolment provision would represent a significant regulatory and cultural shift from the current pensions system in the UK. However, it suggests that transitioning to a CDC scheme system would not only reduce individual member risk but also allow CDC schemes to invest in higher growth assets and generate better investment return over members’ lives. As CDCs provide returns to members from a common fund of investments, they would more easily be able to allocate assets to illiquid and unlisted assets as members’ benefits are provided from the combined scheme asset fund, rather than through segregated individual member accounts with unit-linked investments.

The Government’s call for evidence also suggests that CDCs could play a role in solving the proliferation of small pension pots, as default consolidators and potentially as lifetime providers.

Helping savers understand their pension choices

Continuing the focus on savers, the Government also published its response to its July consultation on proposals to support individual members of occupational pension schemes when they access their pension pots. The consultation’s aim was to establish alignment in service offering among different providers by introducing duties on trustees to consider the needs of their members who want to access their pension pot and develop ways to deliver on those needs. In its response, the Government affirms its initial proposals from the consultation, including:

  • placing a duty on trustees of occupational pension schemes to offer decumulation services with products for members, which must take place at the point of access to members’ pension pots and must be at an appropriate quality and price; and
  • requiring schemes to develop a backstop default decumulation solution, based on the general profile of members, into which a member would be placed if they access their pension assets.

In addition to these proposed measures, the Government will encourage schemes to voluntarily develop a decumulation offer for their members, accompanied by interim guidance brought forward by the Pension Regulator (TPR).

Finally, the Government also sees a potentially significant role for CDCs in decumulation, noting that the Department for Work and Pensions (the DWP) has estimated that the decumulation phase of CDCs may offer a 20% uplift on top of an annuity income level. The Government suggests that pension schemes could consider offering a CDC option in decumulation for their members as the market develops, which could be a default offer to their members.

Driving a more consolidated pensions market

Another central theme of the Mansion House reforms was the need for scale in order for schemes to take advantage of a wider range of investment opportunities. As a result, the Government is clearly aiming to encourage the consolidation of pension schemes and reduce what it sees as the fragmentation of the market. The potential benefits of consolidation – including economies of scale, reduction in member charges and greater investment opportunities – were reiterated in a DWP research paper, issued at the same time as the Autumn Statement proposals, on trends in the DC trust-based pensions market. Indeed, the Chancellor announced in his speech that he expects to see a pensions market in which the majority of savers belong to schemes of £30bn or larger by 2030. However, the drive towards consolidation is not seen by the Government as only applicable to DC schemes. The key proposed measures are set out below.

Evolving the regulatory approach to master trusts

As a part of the Chancellor’s efforts to discourage fragmentation of the market, and acknowledging that master trusts are set to play a leading role in the Mansion House and Autumn Statement reforms, the Government and TPR jointly published a research paper reviewing the master trusts authorisation and supervisory regime, and its place in the wider market. The paper examines the master trust market, including market segmentation and the concentration of members and assets when compared with single-employer schemes. It was noted that ten master trust providers currently participate in the Chancellor’s ‘Mansion House Compact’, under which schemes have pledged to invest at least 5% of their funds in unlisted assets. While concluding that the master trusts regime is overall fit for purpose, the research paper concludes with a number of recommendations for TPR and the Government – including working together to determine whether any legislative action may be necessary in the future.

DB schemes – surplus and public sector consolidator

In July, a call for evidence covering factors which may deter DB schemes from investing in growth assets was published as part of the Mansion House initiatives. The questions in the call for evidence were wide-ranging, covering matters like the rules relating to use of DB schemes’ surpluses, the tax treatment of surplus refunds and the effect of greater consolidation on asset allocation.

One eye-catching idea that was floated in the call for evidence was whether a public sector consolidator could have a beneficial impact – the Pension Protection Fund (PPF) was mentioned as a body with the capability to operate a consolidator fund in a similar manner to pension superfunds, so evidence was sought on whether the PPF’s remit could be expanded in that way.

In its response to the consultation, the Government confirms that it will increase investment by DB schemes in productive finance through two key initiatives:

  1. making extraction of surplus easier – there will be a consultation to consider the detail of the proposed measures. Specifically, the Government will reduce the rate of tax applicable to authorised surplus repayments to sponsoring employers (we understand that this will be from 35% to 25% from 6 April 2024). However, some of the proposals that the Government has indicated will be covered in the consultation would not necessarily make surplus refunds easier:
    1. one noteworthy proposal is for the introduction of measures to “ensure that surplus can be shared with scheme members”. It is unclear what such measures would entail, especially given that currently, whether surplus is shared with scheme members depends on very fact-specific matters, including the terms of the scheme rules, and it is questionable whether there should be any automatic right for members to benefit from surplus if, for example, it is the result of substantial employer contributions;
    2. the Government also notes the need to ensure safeguards including levels at which surplus can be taken and covenant strength, and the possible benefits of a 100% PPF underpin – which suggests that a complex assessment process may need to be undertaken in order for surplus funds to be paid out;
  2. establishing a public sector consolidator – the aim is to achieve this by 2026. Presumably, in the consultation process views will be sought on the design of consolidator and eligibility to run it, but the Government has now confirmed two key points which indicate the direction of travel:
    1. it believes that there is a place in the DB market for a limited public consolidator aimed at schemes unattractive to commercial providers on an opt-in basis; and
    2. it believes that the PPF has the necessary skills and experience to run this consolidator.

Importantly, changes will also be made to the DB funding regime to encourage investment of this type (see more on this below) – addressing some of the concerns that have previously been raised that the thrust of the changes to the funding regime run counter to what the Government is trying to achieve in relation to scheme investments more broadly.

Local Government Pension Scheme (LGPS) – consolidation of investments

The Mansion House reforms announced in July included a consultation on LGPS funds. In it, the Government set out proposals to make greater use of asset pooling. Having considered the feedback on the proposals, the Government’s response confirms a 31 March 2025 deadline for the accelerated consolidation of LGPS assets, setting a direction towards fewer pools each exceeding £50bn assets under management. The response also states that pooling guidance will be published to set out a preferred model of pooling including delegation of manager selection and strategy implementation.

Financial Conduct Authority (FCA) and TPR Value for Money (VFM) announcements

A consultation response (from the Government, the FCA and TPR) on the VFM Framework was published alongside other Mansion House reforms in July. In it, the Government not only adopted key principles for a regime under which DC schemes can be assessed by reference to a common set of VFM criteria, but also stated that the VFM Framework should be a roadmap for consolidation. More recently, the FCA confirmed that it will consult in 2024 on detailed rules for a new VFM Framework for DC workplace pensions. TPR welcomed the FCA’s announcement, as did the Government.

Reframing pension schemes as investors in UK unlisted assets

The final theme in July’s Mansion House reforms was the role of pension schemes as investors in connection with the wider agenda of revitalising the UK capital markets and unlocking investment in growth sectors and infrastructure in the UK. As with all three of the ‘golden rules’, an assortment of measures were aimed at enabling pension funds to invest in a diverse portfolio and these were built upon in the Autumn Statement initiatives.

New investment vehicles tailored to the needs of pension schemes

One day ahead of the Autumn Statement, aimed at driving innovation and unlocking the first tranche of investment from the Mansion House reforms, the Chancellor announced that:

  1. the Government will support new investment vehicles tailored to the needs of pension schemes, allowing investment into UK growth companies;
  2. £250m will be committed to two successful bidders under the Long-term Investment for Technology and Science (LIFTS) initiative which was launched in March 2023, which is aimed at increasing UK institutional investment in venture capital and growth equity;
  3. a new ‘Growth Fund’ will be established within the British Business Bank, which will give pension schemes access to opportunities in UK growth businesses. This follows the British Business Bank engaging with the market to explore the case for the Government to play a greater role in establishing investment vehicles to allow pension schemes to invest quickly and effectively in UK unlisted growth companies. This takes forward one of the main LIFTS initiative proposals, which was for pension schemes to take advantage of the expertise and experience of the British Business Bank in venture capital and potentially to co-invest with it in such opportunities; and
  4. a new ‘Venture Capital Fellowship scheme’ will be established to support the next generation of investors in UK VC funds.

DB schemes – changes to funding regime

As noted above, alongside the proposals in relation to use of surplus and the establishment of a public sector consolidator, the Government’s response to the call for evidence on options for DB schemes mentions that changes will be made to the forthcoming DB funding code of practice (the Code) (issued in a consultation draft by TPR in December 2022) to support a less risk-averse approach and thereby, potentially, encourage more DB scheme investment in productive finance. It has been recognised that as DB schemes mature, they would in aggregate reduce their investment risks and aim for closer alignment between liabilities and investments and hence reduce the level return-seeking investments they hold (as they have already done to a very large extent over the past 20 years). But there have been widespread industry concerns, which were raised in the consultations on the Code and the proposed new funding regulations, that the changes would greatly accelerate DB schemes’ risk reduction and push them away from equities and other growth investments.

According to the response, the revised funding regulations will make clearer what prudent funding plans look like, make explicit that there is headroom for more productive investment, and require schemes to be clear about their long-term strategy to provide member benefits. This is a welcome announcement as it demonstrates that the Government has acknowledged the interplay of its aims for productive investment with the emerging DB funding regime. This therefore indicates that the Autumn Statement announcements may mark an important change in direction on DB scheme funding.

LGPS – expanding their role as investors in private equity and levelling up

Also in the consultation on LGPS funds were proposals to increase LGPS funds’ investment in levelling up and private equity. The Government’s response confirms that these will be taken forward by:

  • amending the LGPS regulations to require funds to set up a plan to invest up to 5% of assets in levelling up in the UK, which means investment that make a measurable contribution to one of the levelling up missions set out in the Government’s February 2022 Levelling Up White Paper (and to report annually on progress against the plan); and
  • revising investment strategy statement guidance to require funds to consider investments to meet the ambition of a 10% allocation to private equity. The Government will also amend regulations to require funds to set objectives for investment consultants.

Pension trustee skills, capability and culture

Of course, an enhanced role for pension schemes as investors brings with it an increased focus on pension scheme trustees. The Mansion House proposals included a call for evidence regarding the skills, capabilities, and culture of both DC and DB occupational pension scheme trustees in the UK. Through this call for evidence, the Government hoped to better understand the knowledge and skills of trustees and whether they have the capacity to consider the full breadth of investment opportunities open to them.

The Government’s response states that, while the majority of trustees are well-supported, knowledgeable and hard-working, there is space for action to ensure that all trustees are able to work effectively. TPR will therefore develop and take forward a register of trustees, which will enable targeting of trustees and schemes requiring additional support to fulfil their obligations. The Government also strongly encourages all professional trustees to seek accreditation and will consider whether legislation should be taken forward to mandate this in future.

In addition, in order to ensure that trustees have a good understanding of all potential types of assets, the Government will encourage those who train trustees to revisit their coverage of alternative asset classes and will support TPR’s investment guidance in this area. Finally, as the role that employers play in selecting a pension scheme is a decisive one when it comes to the investment options trustees are then able to pursue, the Government will work with TPR to produce additional information for employers to help them select a scheme based on value.

This year’s Autumn Statement announcements are broad and significant, taking forward many of the proposals announced in the Mansion House speech while paving the way for further consultations on a wide range of areas. While it remains to be seen what impact they will have on sponsoring employers, trustees and members, and on the pensions market as a whole over time, in the short to medium term they are likely to result in extensive changes to the pensions regulatory regime. For more information on these measures, please speak to the authors of this blog post or your usual Freshfields contact.