Zarah ChoudharyEmployees will benefit from an overhaul of workplace pensions, Chancellor Rachel Reeves announced in her Mansion House speech.
The reforms aim to enhance retirement savings while unlocking billions for investment in UK businesses.
The Mansion House Compact includes major defined contribution (DC) pension providers committing to allocate at least 5% of their default funds to unlisted equities by 2030, compared to the current level of less than 1%.
This move is expected to unlock up to £50bn for high-growth UK companies.
For employees, the change could increase retirement savings by 12% over their career, equating to over £1,000 more annually in retirement for an average earner starting to save at 18.
To support this, the Government will facilitate the consolidation of smaller DC pension schemes to enable them to maintain diverse investment portfolios and deliver stronger returns for savers.
Pension schemes that fail to achieve the best outcomes for members may be wound up under stricter performance oversight by regulators.
A new Value for Money framework will be introduced, requiring investment decisions to focus on long-term returns rather than short-term costs.
The Government will also encourage the development of collective defined contribution (CDC) funds, a newer pension model believed to offer improved outcomes for savers.
To further expand investment opportunities, Reeves announced the launch of the LIFTS competition, which will allocate up to £250m to support investment vehicles designed to help pension schemes invest in high-growth companies.
The Government is also exploring the creation of new investment vehicles leveraging the expertise of the British Business Bank, which has already mobilised £15bn for more than 20,000 businesses.
For Defined Benefit (DB) schemes, the reforms include plans to introduce a permanent regulatory regime for superfunds, allowing these schemes to manage liabilities at scale more effectively.
A call for evidence will also examine the role of the Pension Protection Fund and the potential for DB schemes to contribute to productive investments while safeguarding the gilt market.
Local Government Pension Schemes (LGPS) will also undergo reforms, with a deadline of March 2025 for consolidating assets into larger pools, each exceeding £50bn.
The government aims to double LGPS investments in private equity to 10%, potentially unlocking £25bn by 2030.
These measures collectively have the potential to unlock an additional £75bn in growth-focused investments by the end of the decade.
Reeves emphasised that these reforms leverage private sector capital rather than public spending, delivering growth while prioritising pension savers’ long-term interests.
Reaction:
Jamie Jenkins, director of policy at Royal London:
“These reforms are intended to encourage higher levels of domestic investment, and create much greater scale, allowing more scope for pension funds to invest in longer-term assets.
“Delivered well, this could give rise to higher returns to pension savers and help grow the UK economy at the same time, which would be good for everyone.”
“The Government has set out a plan to have fewer, larger pension schemes.
“While scale itself does not deliver better retirement outcomes for savers, there is evidence from comparable pension systems in Australia and Canada that there is a point of critical mass whereby it is easier to invest in longer-term, illiquid assets.
“This could give rise to greater returns, but also affords more capital for investment in vital infrastructure and growth areas of the economy.
“It is encouraging to see the level of detail in the consultation to fully unearth how scale operates at present, and whether this is achieved within the scheme or investment layer of the various pension propositions in the market.
“The industry has become overly focused on the charges levied, despite the backstop of a regulatory charge cap.
“Pension propositions have evolved enormously since the introduction of automatic enrolment, so any shift away from price to a broader consideration of value is a welcome step.
“We welcome the changes to allow contract-based schemes to transfer funds without consent, provided the right safeguards are in place to protect the interests of customers.
“This will put contract-based schemes on a level playing field with trust-based schemes.
“It seems sensible to explore the merits of a duty on employers to consider the value provided by its workplace pension scheme, but care must be taken not to impose a disproportionate burden on smaller employers, who will not have the resources or skills to carry this out effectively.
“Royal London is delighted to be a founding member of the industry-led Mutuals Council, and we strongly welcome the Chancellor’s formal endorsement of its creation.
“As the UK’s largest mutual life, pensions and investment company, we look forward to working with the Government to help deliver its ambition to double the size of the sector and strengthen the mutual choice for UK consumers.”
David Postings, chief executive at UK Finance:
“The Chancellor has set out a positive vision for financial services, which are a UK success story and vital to our economy.
“I strongly welcome her support for the sector, coupled with the fact that she is addressing how we can best balance risk and consumer protection to help support economic growth.
“Key to this is the regulatory environment, with the new remit letters rightly stressing the importance of growth and competitiveness in regulators’ work.
“The Chancellor has listened to industry and is delivering across a range of areas we have called for action on, including a digital gilt, tackling payment fraud, reforming the Financial Ombudsman Service, supporting green finance, and the National Payments Vision.
“I look forward to continuing to work closely with her and the government to ensure the UK retains a strong and globally competitive financial services sector.”
Tom Selby, public policy director at AJ Bell:
“Rachel Reeves has placed the UK’s financial services sector front-and-centre of the government’s drive to power long-term growth.
“From creating pension ‘megafunds’ to a shake-up of the approach taken by regulators and reforms aimed at improving the help available to investors, the Chancellor clearly wants to show she means business about turbo-charging the economy.
“It is certainly fair to say there has historically been a focus on the risks of investing for retail customers in UK regulation, often resulting in the potential long-term benefits being drowned out by risk warnings.
“Moving to a more balanced disclosure approach and making sensible reforms to the advice guidance boundary are both crucial to creating an investing culture in the UK – something which should ultimately help investors get better outcomes and boost UK plc too.
“Social media platforms are awash with questionable financial offers from bad actors and influencers duped into plugging sub-standard or fraudulent financial products.
“The FCA and ASA have already issued warnings against fin-fluencers pushing get rich quick schemes on social media, and a number of celebrity influencers have been interviewed under an FCA crackdown on fin-fluencers suspected of plugging financial products illegally.
“The chancellor has signalled that it isn’t just the individuals on social media platforms who need to take responsibility for this, however, with the social media companies themselves also being asked to demonstrate they’re making progress to tackle scams.
“When it comes to investing more of people’s pension pots in ‘productive’ assets in the UK, it is vital the long-term needs of savers are not side-lined.
“Ultimately, the main role of investing for retirement is to deliver good outcomes in retirement. In the Government’s increasingly desperate search for investment and growth, it is crucial savers and retirees are not forced to pay the price through sub-standard investment returns.”
Lisa Picardo, chief business officer UK at PensionBee:
“A proposal to create pension megafunds could signal a transformative shift for the UK pension landscape.
“The creation of larger funds does have the potential to bring scale benefits, such as improved investment opportunities in areas like infrastructure and green projects, but these advantages must be weighed against the risks.
“Clear governance, accountability, and a commitment to responsible investment are essential to balancing savers’ best interests with the drive for innovation.
“While we support any initiative aimed at strengthening retirement outcomes, it’s critical that consolidation efforts prioritise savers’ returns, ensuring that member security, choice and transparency remain central.
“In addition, any size requirements should be part of a broader strategy that enables diverse providers to thrive while delivering strong returns and supporting responsible investment, ensuring that all savers can access high-quality, value-driven pensions.
“We see Local Government Pension Scheme (LGPS) pooling as a substantial opportunity to lead the way in investing in UK-based assets, such as listed equities and unlisted infrastructure and other asset classes.
“Given the added protections offered by the LGPS structure, these funds are uniquely positioned to act as forerunners in establishing a robust market, paving the way for defined contribution (DC) schemes to follow if justified by the success demonstrated and calibrated by healthy returns for savers.
“With the existing fragmentation within the LGPS, the potential for increased efficiencies and economies of scale are clear.
“This move not only has the potential to enhance value for savers but could also bolster UK investment and growth.”
Alison Leslie, head of DC Investment at Hymans Robertson:
“It is really good to see the Government making moves to improve value for members of DC Pension schemes, especially where they are in poorly performing arrangements.
“Scale helps provide the ability to access a wider range of asset classes to generate higher returns for members.
“Scale should improve value for members across all services including investment. However, care will need to be taken to progress to this.
“There must be a clear governance process to ensure decisions are made for member benefit. There are many well performing well governed smaller schemes in existence.
“There is also the risk of stifling innovation if the scale of the mega fund is too high and smaller providers, who are currently innovating, are crowded out.”
Chris Curry, director of Pensions Policy Institute:
“PPI research has highlighted the many potential benefits of scale in pension fund investment and the process of consolidation has already started in many parts of the pensions industry.
“These proposals would accelerate that trend.
“Large international pension funds invest globally, not just in their own domestic markets, so for a smaller number of larger UK funds to positively impact on UK growth, there must also be more opportunities for good investment in the UK.
“It is essential that the members of pension funds still see good retirement outcomes, so investment will still need to have good returns.”
Simon Kew, head of market engagement at Broadstone:
“It is encouraging to see true reform proposed by the Chancellor to initiate serious dialogue around unlocking investment into the UK for productive finance to drive sustainable economic growth.
“So long as members are protected and UK investment can be kick-started successfully, then the proposals should be approached positively.
“Along with measures to deliver better value for pension savers, a consultation on how the Government can best help people make better-informed financial decisions demonstrates a welcome desire to improve financial outcomes for households.”
