Mansion House speech: More nuance, more consultation

Executive summary:

• The government’s mantra “pension funds should invest more in the UK” appears more nuanced than some may have expected.
• While there are some details available in the Pensions Investment Review: interim report, many of these remain subject to further consultation, with two new consultations launched.
• The juxtaposition between reforms designed to reduce the regulatory burden on financial services, while also exerting greater influence over the allocation of assets, is a notable tension.
  
   

Yesterday, Rachel Reeves delivered her Mansion House speech, with the key themes of increasing private investment and economic reform being largely as expected. As always, the specifics will be crucial for investors to consider.  

It appears the government’s mantra “pension funds should invest more in the UK” has become more nuanced. In Reeves’ speech there was recognition that UK corporate defined benefit (DB) pension funds are one of the biggest investors in gilts and this is unlikely to change anytime soon – after all, DB funds have de-risked and are not going to re-risk en masse.  As a result, the focus of encouraging “more pension fund investment into productive assets” is largely aimed at defined contribution (DC) pension funds and Local Government Pension Schemes (LGPS).   

Is big better?

The Chancellor committed that next year’s Pension Scheme Bill will deliver a significant consolidation of the DC market and legislate further consolidation of LGPS. Drawing inspiration from the pension markets in Canada and Australia, she firmly believes in the principle that bigger is better.  

At this stage it is difficult to judge Reeves’ plan. While there are some details available in the Pensions Investment Review: interim report, many of these remain subject to further consultation, with two new consultations launched.

The ‘LGPS: Fit for the Future’ consultation covers three key areas:  

• Reforming LGPS asset pools by mandating minimum size, forcing FCA authorisation and requiring 100% of assets to be pooled by administering authorities. 
  
• Boosting LGPS investment in their localities and regions by requiring administering authorities to set local investment allocation targets, while demanding greater collaboration and reporting on the investment impact. Pools will remain on the hook for investment decisions, due diligence, and providing advice.
• Strengthening governance of Administering Authorities and Pools through training members on committees and representation on pool boards.   

In the balance 

The direction of travel has been set for some time: increased consolidation of pensions assets and more influence over the allocation of capital. Getting the balance right is going to be a challenge for central and local government, regulators, and industry.  

The Chancellor highlighted areas for reform of the financial services regulatory regime, including targeting the SM&CR regime. The new growth-focused remits to PRA, MPC, FRA and PSR are designed to tilt allocations away from the current environment that Reeves perceives to be too risk averse.  

The juxtaposition between reforms designed to reduce the regulatory burden on financial services, while also exerting greater influence over the allocation of assets, is a notable tension. It reflects the reality of the balance required to encourage the desired behaviour while optimising investment decision making.  

Looking forward 

The interim report of the Pensions Investment Review and consultation document shows how far LGPS investment has come over recent years and the need to recognise its successes. It also demonstrates that there isn’t one right answer. The fact that eight pools can exist with different operating models is a good thing when addressing such a complex, national problem.  

We look forward to continuing to work with our LGPS clients through this consultation and, most importantly, to support their development of innovative solutions to improving investment outcomes and enhancing efficiency.  

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.