Mansion House speech: is there a pension shake up on the cards?

On Thursday 14 November, Chancellor Rachel Reeves delivers her Mansion House speech. Treasury briefing says this will “set out how we will support our world leading financial services sector to grow, innovate and finance growth around the country”.

The Chancellor inherits plans from the previous government to encourage more UK investment in infrastructure and private-equity-financed businesses and is likely to want to accelerate and improve these. She may also be revisiting and underlining the requirements on regulators where the past government introduced an additional objective for regulators to assist UK growth.

Some business groups have responded negatively to tax and other cost rises in the recent Budget, especially where they employ a large workforce of lower paid and part time people. The Chancellor will be keen to stress the opportunities for the UK and demonstrate how large pools of capital in the UK could be better mobilised for new and existing business ventures and new infrastructure.

The possible Reeve proposals

The local authorities run some 86 pension investment funds for their various Pension schemes. The Chancellor favours the idea of amalgamating them to get economies of scale in investment management and to allow a higher overall total of higher risk unquoted investments. This is an updating and wish to go further and faster with the inherited policy.

This is not going to be easy to do, as it requires the consent of all the individual funds and councils to further changes to establish stronger and more comprehensive pooling. It does not imply pooling of risks, as some councils think their pension funds are better funded than others and will not wish to join a collective scheme with lower funding levels.

The government sees the opportunity to reduce overall fees, as investment manager numbers would be pared, and they would accept a lower percentage fee for running much enlarged assets. However, if the enlarged scheme shifted substantial money into private equity and infrastructure as envisaged then there would be a substantial increase in the fee rates on that portion of the new larger fund. Private equity and infrastructure are expensive to manage.

These proposals build on existing policy

In 2015, the UK government announced a policy to persuade local government pension schemes to pool assets to lower investment costs. Council pension funds chose to join groupings of councils to set up pooled investment management. Responsibility still rested with the trustees of each individual fund. The pools recruited people to assess risks, deal with asset allocation and select managers. They achieved some fee rate reductions by offering investment managers substantially more money to manage than any individual fund could do.

In November 2023, the then Chancellor Jeremy Hunt urged the local government pension funds to go further and faster in creating larger pools of capital. He stressed that considerable benefit could come from these pools investing more in private equity and infrastructure which he expected to earn higher returns.

The government did not take powers to require the funds to do this, nor to override Trustee duties to supervise the asset allocation and to take appropriate investment advice about risks and rewards. The Treasury mentioned the possibility of getting up to 10% in private equity, an overall investment of around £35bn if all the funds did this through comprehensive pooling.

The rules applying to pension trustees

The Pensions Regulator has laid out rules and guidance to trustees concerning their duties. Each pension fund has trustees to supervise the fund and the treatment of members, and reports to the regulator. The trustees must operate under the Trust Deed of the fund in the best interests of scheme members. They do set down the investment strategy of the fund after taking investment advice. They need to proceed “impartially, prudently, responsibly and honestly”.

Trustees are reminded to “choose investments that are in the best financial interest of scheme members – e.g. you must not let your ethical or political convictions get in the way of achieving the best returns for the scheme”. Trustees need to diversify the fund to spread risks, and to consider carefully risks and rewards on investments. They are also told that “scheme assets should be invested mainly in regulated markets”.

There is an abundance of law, rules and case law arising out of the issues covered by this regulator guidance. The government could of course amend or repeal the law to allow or even require trustees to concentrate their portfolios more into UK equity and or private equity and infrastructure, but this could prove time consuming and contentious. It appears that the government is wishing to encourage more private equity and infrastructure by creating very large public sector investment pools.

These, in turn, by investing a small percentage in infrastructure or private equity in the UK could deliver a substantial boost to investment in these areas. Trustees of such funds could be persuaded to allow a bigger investment in UK shares and new unquoted investments whilst keeping the percentage sufficiently low to meet requirements on risk and diversification.

For the policy to succeed there needs to be an accessible range of suitable UK investment opportunities in infrastructure and business activity. The public sector pension funds would need to employ managers or advisers to set up a good system to identify the projects, reach contract terms with the entrepreneurs and then manage the investments through their life cycle.

It is true the overall large collective council asset base could take on a bit more illiquid and riskier investment in search of higher returns. It is also true that under existing trustee law the trustees and the councils that appoint them need to satisfy themselves that there is likely to be sufficient extra return for the extra risk, and to ensure there is enough cash and liquid assets in the fund to meet outgoings over a reasonable period.

The Chancellor also inherits work on markets and regulators from the previous government. There is possibility she will publish new guidance for regulators, underlining their new secondary duty to promote growth.

She might wish to pick up the idea of PISCES, a suggested Private intermittent securities and capital exchange system. This was a proposal the Treasury consulted on in April 2024. The idea was to allow smaller private companies to be able to trade shares on an intermittent basis on a controlled platform.

There would need to be lesser but appropriate disclosure requirements than for public markets, and there would be intermittent liquidity and transactions. This would be in addition to the current AIM market which provides disclosure and liquidity for more sustained trading in shares and price formation based on the trades.

Her options include quietly dropping the idea for lack of support or developing it to the next stage by setting out a preferred scheme based on the responses to the consultation and their judgement of potential interest in it.

It would be important not to turn it into a paler version of the Alternative Investment Market (Aim). It raises difficult issues over how little liquidity and how infrequently shares could trade to still make it worthwhile compared with current practice of private sale of shares organised by specialists whether it be for the sale of a whole business, or the sale of new shares to raise additional capital.

Conclusion

The Chancellor will aim to raise spirits by pointing to many investment opportunities in the UK, and by nudging public sector pension schemes to investing more at home in assets other than bonds. It is less likely she will announce major changes to trustee law and ownership of the segregated council pension funds. She may also try to influence markets in the direction of making it easier to raise capital and trade shares in UK ventures.