The U.K.’s pension shake-up is facing pushback

This report is from CNBC’s UK Exchange newsletter. Each Wednesday, Ian King brings you expert insights on the most important business stories from the U.K. and the key personalities shaping the news. Along with a deep dive into these top stories, the newsletter highlights key developments in the U.K. and essential events that are set to make waves. Like what you see? You can subscribe here.

Since the Global Financial Crisis, poor productivity has bedeviled the U.K. economy for various reasons, including regional disparities and over-dependence on London and the southeast of England.

Most economists agree, though, that the main factor has been low investment in skills and infrastructure.

In response, the last government devised the “Mansion House reforms” in July 2023, so-called because Jeremy Hunt, then chancellor of the Exchequer, announced them at the official residence of the Lord Mayor of London (the Lord Mayor, not to be confused with Sadiq Khan, the mayor of London, is head of the City of London Corporation, the Square Mile’s governing body).

The proposals sought to unlock £75 billion ($102 billion) from defined contribution and local government pension schemes with the aim of directing a greater proportion of retirement savings toward private markets and assets such as infrastructure.

In his announcement — which carried approving quotes from the likes of Jamie Dimon, chairman and CEO of JP Morgan Chase, and C.S. Venkatakrishnan, the Barclays CEO — Hunt noted: “The United Kingdom has the largest pension market in Europe, worth over £2.5 trillion … but how this money is invested is limiting returns for savers.”

“Comparable Australian schemes invest ten times more in private markets than U.K. schemes, reaping rewards that U.K. savers are missing out on,” he went on.

The news was accompanied by a “Mansion House compact” in which nine of the U.K.’s largest defined contribution pension providers committed to allocate 5% of assets in their default funds to unlisted assets, such as private equity or start-ups, by 2030.

When Rachel Reeves succeeded Hunt, in July 2024, she pledged to build on the proposals and, for a while, there was excitement in the pensions industry.

Unfortunately, it feels as if that initial enthusiasm has curdled.

An early indication the industry might not be completely in tune with Reeves’s ambitions came after she announced, last November, plans to create “megafunds” — modelled on Australia’s superannuation funds and Canadian pension schemes such as the Ontario Teachers’ Pension Plan — by consolidating assets from 86 separate local government pension scheme authorities into eight pools each worth an average of £50 billion by 2030.

In theory, this would unlock huge efficiency gains, as well as allowing more money to be invested, longer term, in private assets and infrastructure.

But it has run into criticism — partly because local authorities fear losing influence over how their pension assets are invested and partly because of the likely job losses among local government officials.

Alongside this, the government aims to encourage consolidation among the U.K.’s defined contribution pensions, the main means by which Britons now save for retirement. It wants defined contribution multi-employer pension schemes to be worth at least £25 billion by 2030, again with the aim of building scale and efficiency, with schemes also empowered to transfer assets into the planned megafunds.

This has won broad industry backing. In May, 17 leading defined contribution scheme providers signed the “Mansion House accord,” building on Hunt’s 2023 compact, volunteering to invest 10% of their workplace portfolios in assets like infrastructure, property and private equity by 2030. At least 5% would be ring fenced for U.K. assets.

So far, so good.

Explosively, though, the government is planning a “backstop provision” allowing it to set “binding asset allocation targets” — in other words, forcing megafunds to invest in private markets and U.K. assets if they fail to meet the voluntary targets. The justification is to ensure some schemes do not lose business by making costly up-front investments, while rivals hold back.

But it has proved contentious. Some in the industry question why ministers should tell them how to allocate assets and have noted the irony in ministers and civil servants — who enjoy generous defined benefit pensions funded by taxpayers — obliging those same taxpayers to adopt more risk with their own retirement savings.

Amanda Blanc, chief executive of Aviva, one of the U.K.’s biggest insurers, spoke for many when she called the measure a “sledgehammer to crack a nut.”

UK stocks in the spotlight

There are questions on how mandation might be enforced and why, if unlisted assets are so attractive, these schemes are not already invested in them.

Several senior leaders have also told me privately that there is insufficient industry expertise to manage such assets.

Reeves sought to defend the move when, last week, she told The Times CEO Summit that she doubted it would be necessary to use the backstop.

However, the following day, the Financial Times reported that Scottish Widows, the U.K.’s second-largest pensions provider, is cutting the U.K. equities allocation in its highest growth portfolio from 12% to just 3%.

Significantly, Scottish Widows — which is owned by Lloyds Banking Group — had signed the original Mansion House compact, but not the later accord.

Simon French, the influential head of research at the investment bank Panmure Liberum, described it as “an inevitable reaction to the Mansion House accord which … pushes/strong-arms U.K. pension flows into private assets over the next five years.”

Ironically, all this is happening just as, after years of indifference among investors, U.K. equities are having their moment in the sun, with the FTSE 100 so far outperforming not only the pan-European Stoxx Europe 600 but also the S&P 500 this year.

One prominent City figure told me last week that his investment bank’s trading desk had just enjoyed its busiest day in more than 20 years — with American investors, in particular, showing renewed interest in U.K. equities.

Ministers will argue that, with tax relief to private pension contributions costing £46.8 billion in 2022-23, the latest year for which figures are available, they are entitled to ask for more pension savings to be channelled toward the U.K. economy.

Institutions might respond that, if the government is keen to see that happen, it might remove some barriers to investing in the U.K. such as the unpopular 0.5% levy paid on share purchases.

It all creates a sense that, while ministers and investors are agreed on the desirability of investing more in the U.K., there is little agreement on how to achieve that.

And it certainly feels as if Reeves and her colleagues are more interested in seeing investment in private assets rather than public markets.

— Ian King

U.K. stocks have fallen by 0.8% over the last week, with the FTSE 100 finally closing flat on Tuesday after three consecutive trading days of losses.

Meanwhile, the British Pound gained nearly 1% to reach $1.36, its strongest level against the U.S. dollar since January 2022, according to FactSet. In government bond markets, 10-year gilt yields slipped over the last week and now trade around 4.47%.

In case you missed it, Amazon said it will invest £40 billion in the U.K. over the next three years to build and upgrade its large warehouses. The British government welcomed the investment as it looks to boost domestic growth and productivity.

— Ganesh Rao