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Article | Pensions Briefing

Productive finance reforms give pension trustees pause for thought

By Zoë McCrossan and Chia Wei Lim | August 25, 2023

In this article, we delve into proposed changes from the UK Government to boost investments in productive finance.
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The UK has a low level of investments in productive finance compared to other nations. If nothing is done, these levels are likely to decline further over time as defined benefit (DB) pension schemes de-risk or settle (as it has been over the last decade).

Whilst the defined contribution (DC) market is poised for exponential growth, historically there hasn’t been material amounts invested in productive finance (the Chancellor estimated that 0.5% of assets are invested in private equity currently).

The Chancellor’s Mansion House speech on 10 July laid out an overall vision of policy change to increase productive investment in the UK and improve outcomes for savers. An unprecedented number of wide-reaching consultations followed, with the promise to impact all aspects of pension provision in the UK. The package of reforms announced are not entirely new ideas, with the publication of several responses to earlier consultations, and therefore can be viewed as an evolution rather than a revolution in pension policy.

The proposals on investment represent a change from the past where the UK Government has shied away from imposing quantitative restrictions on how trustees invest, preferring instead to mandate the factors that trustees should take into account when taking investment decisions.

Is there an alternative route to settlement for DB schemes?

The conventional wisdom for many (but not all) DB schemes would have been settlement when it becomes affordable to do so. The recent announcement has given schemes pause for thought with the publication of a call for evidence to support the development of innovative policy options – which could offer more choices for DB sponsoring employers and trustees, increasing protection for DB members and supporting wider economic initiatives. So for example, trustees may be considering if it makes sense to sell illiquid assets on the secondary market at a discount to facilitate settlement in the short term, when future regulatory changes could make it easier for the sponsor to access surplus, and therefore decide to run-off for a while?

Details of the new regime for consolidators provide a helpful endorsement around the right strategic framework for run-off. For example the documents set out:

  • Best estimate liabilities with a Gilts + 1% pa discount rate in current conditions that subsequently varies with market conditions
  • Separate longevity and expense reserves
  • Separate capital (possibly in contingent form) looking to cover the 1-in-100 Value at Risk over one year on this basis

However, this is somewhat at odds with the Pensions Regulator’s draft funding code. Whilst both poorly funded schemes looking to consolidate and well-funded schemes looking to settle or run-off will be thinking about investment and funding in this way, schemes in the middle will potentially be using the more traditional approach from the funding code.

This will mean that consolidators and annuity providers can take profits annually from the asset pool, but this will be harder for schemes running-off without being able to use other mechanisms to access economic value such as offsetting future accrual costs or contingent funding arrangements.

DC – the first mover?

Nine of the largest DC pension providers have signed the “Mansion House Compact” committing to investing 5% of their default funds in private equity by 2030. At the margin, a move to a master trust is incentivised, since this will provide a turnkey solution to private equity investment. For other schemes, private equity will be an important topic to cover in future DC investment strategy reviews. The Government estimates up to £50bn could be allocated to “high growth” companies.

We expect that many DC schemes may adopt a “wait and see” approach to greater investment in private equity. They can seek second-mover advantage with the large master trusts encouraging product development in this area and creating operationally robust solutions from which the wider market can pick from subsequently.


The Government is asking a lot of the right questions, some of which reflects the latest thinking from our White Paper: Six changes to seize the DB pension surplus opportunity. These unprecedented number of wide-reaching consultations is likely to lead to innovation in the industry, which is much wider than just pensions. Although the timings are unclear, it is certain that legislation will follow and the devil will be in the detail – precisely how it will work in practice remain to be seen.


Zoë McCrossan
Director, Retirement
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Chia Wei Lim
Director, Retirement
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