Mansion House Reforms: Is market consolidation the only way?

When Jeremy Hunt delivered his Mansion House speech in July of last year, it was the UK pension regime that took centre stage. To many industry observers, the Chancellor’s speech signalled the start of something new—a radical overhaul that, for some, is as warranted as it is overdue. 

But why the keen interest in pension schemes? In short, the Chancellor is trying to stimulate growth in the UK economy. The extent to which this can be achieved through monetary and fiscal policy is limited, which is why the assets held by UK pension schemes represent something of an untapped resource. As far as domestic growth is concerned, increasing pension scheme investment in ‘productive finance’ has real potential.

Recap: What is productive finance? 

• According to the Bank of England, “Investment in productive finance refers to investment that expands productive capacity, furthers sustainable growth and… make(s) an important contribution to the real economy”. 
• Examples include manufacturing plants and equipment (which can help businesses achieve scale), research and development (which improves the knowledge economy), and technologies, infrastructure, and unlisted equities related to these sectors.¹

Where does DB consolidation come into it? 

Today, the DB market is—to borrow directly from the Chancellor’s speech—‘fragmented’. The majority of schemes are small, with less than £100 million in assets, meaning they lack the necessary resources to invest in productive finance, as described above. Consolidation would change this: a smaller number of schemes would hold a greater proportion of the UK’s pension assets. As well as driving the Chancellor’s growth agenda, having fewer, bigger schemes creates economies of scale, potentially improving outcomes for members and scheme sponsors alike.

What are the pros and cons? 

There’s plenty to be optimistic about here. In essence, the Reforms look to achieve three very worthy objectives (more on this later). 

They also pose a healthy challenge. Should an insurance buy-out really be considered the Holy Grail for DB schemes? Is de-risking always the right course of action? Where many in our industry would once have answered ‘yes’ without hesitation, in reality, the situation is much more nuanced.

That said, potential issues arise when considering each of the aforementioned objectives in turn: 

How are SEI’s client directors helping?

As discussions concerning the Mansion House Reforms gather pace, we continue to reflect on the issues that matter most to DB trustees. As a global company with a significant UK footprint, SEI services defined benefit (DB) clients, defined contribution (DC) clients, and the broader financial advice industry. Our client directors bring this breadth of experience of bear in advising schemes on a wide range of topics, including regulatory reform.  

¹‘Her Majesty’s Treasury, Bank of England and Financial Conduct Authority convene working group to facilitate investment in productive finance’, Bank of England, 20 November 2020.

²The Maxwell scandal refers to the theft of c.£500 million of pension fund money from the pension funds of media tycoon, Robert Maxwell’s, companies. The scandal led to the Pensions Act 1995 and other key pension reforms, which were designed to protect pension schemes from the vagaries of the sponsoring employer.

³For example, when one expects a negative return in real terms.

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