The ‘Mansion House reforms’ were outlined last night by Jeremy Hunt, the Chancellor of the Exchequer.

The ideas centre on changing how pension funds invest the money we save for our retirement. The Government noted that the automatic enrolment scheme – where employers are forced to open and contribute towards pensions for staff ‒ has been effective in increasing the number of people saving for their later years.

In 2021 for example a total of £115 billion was saved in pensions.

However, Hunt suggested that the way that this money is invested is limiting returns for pension savers, noting that comparable schemes in Australia are far more likely to invest in private markets and therefore enjoy greater returns.

In a bid to change this, nine of the largest pension providers ‒ who represent the majority of the defined contribution workplace pensions market ‒ have committed to allocating 5% of the assets in their default funds to unlisted equities by 2030. 

These investments are riskier and less liquid ‒ meaning it can take time to sell the assets included ‒ but have the potential to deliver bigger returns.

The Government argued that doing so could ‘unlock’ up to £50bon of investment in high growth companies if all defined contribution pension schemes follow suit, while more effective investments by such schemes could increase pension pots by up to 12%. That’s the equivalent of up to £16,000 for the average earner.

Getting value for money from pension investments

The reforms will include establishing a new ‘value for money framework’ which will mean that pension firms need to base their investment decisions on long-term returns and not simply costs. If firms are not achieving the best possible outcomes for their members, they will be wound up into larger, better performing schemes.

The Government pointed to its analysis that over a five-year period there can be as much as 46% difference between the best and worst performing schemes, which can have a big impact on the size of your pension pot.

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

Not all savers will win

The reforms are a “shot in the dark” argued Becky O’Connor, director of public affairs at PensionBee, who warned that there were no guarantees that everyone will win from the changes.

She explained: “While riskier, early stage investments could generate growth and higher pension pots over the long-term, there is also a chance that some of these investments may perform badly. Earlier stage businesses are generally riskier and many of them could fail.” 

As a result, pension savers could end up with lower retirement income.

All a question of opportunities

Investing in illiquid assets can boost long-term returns, and is something that big overseas schemes have done for years, pointed out Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.

She added that if the opportunities are good enough then pension funds should not need to be forced to invest in them.

“When comparing the UK market with others, such as Australia, it is important to note the key differences – most notably the number of small schemes in the UK. This lack of scale forms a key barrier to investing in more illiquid assets,” she continued.