In November's Mansion House speech, accompanied by a press release issued in advance, the Chancellor set out a number of reforms set to alter the pensions landscape in the UK, with a particular focus on Local Government Pension Scheme (LGPS) reform and consolidation of defined contribution (DC) pension schemes with the aim of improving UK growth and investment.

Following very limited pensions announcements in Labour's recent budget, it was widely speculated across the industry that pensions would be a key focus in Rachel Reeves' first Mansion House speech as Chancellor. We have provided a recap of the key pension reforms below, which follow the government's July 2024 landmark Pensions Reviews of workplace DC schemes and the LGPS in England and Wales.

Local Government Pension Scheme (LGPS)

The focus of reform for the LGPS is the minimisation of "fragmentation and inefficiency" through consolidation. Since 2015, the 86 Administering Authorities (AAs) in England and Wales have already grouped together in eight self-selected groups to progress towards managing investments within an asset pool.

As such, the Chancellor's speech focused on three key growth areas for the LGPS:

  1. Reforming the LGPS asset pools – AAs would be required to fully delegate investment strategy to the pool and transfer legacy assets to the pool, with pools requiring FCA regulation.
  2. Boosting LGPS investment in their localities and regions in the UK – AAs will be required to set our approach to local investment, work with local authorities and include details of progress in annual reports.
  3. Strengthening the governance of both LGPS Administering Authorities and LGPS pools – building on recommendations from the 2021 Good Governance Review to require governance strategies, requirements for committee members and senior officers, and inclusion of shareholder representatives on pool boards.

Consultation on the proposed reforms is currently open for responses, closing on 16 January 2025, with the government proposing an indicative timeline to move to the new asset pool model by March 2026.

Some concerns across the industry have already been raised around the timeline, conflict of interests due to strategic asset allocation advice coming from the pool, and that it may minimise investment opportunities, recommendations or options.

This does not apply to LGPS in Scotland and Northern Ireland, where it is yet to be seen what changes may be proposed.

Defined contribution schemes

The Chancellor also announced plans to deliver significant consolidation of the defined contribution pension scheme market, in order to "enable schemes to deliver better saver outcomes" and invest the support growth.

The accompanying consultation sets out proposals to legislate for a minimum size and maximum number of defined contribution pension scheme default funds, again with the aim of achieving better investment and value for members through scale. Whilst the consultation confirms that there is no conclusive evidence of optimal size of Assets Under Management (AUM), some data suggests that greater benefits arise at £25 billion to £50 billion.

Another major aspect of this consultation is the proposal to enable a contractual override to enable bulk transfers without individual member consent, for individuals in contract-based pension arrangements.

The consultation similarly closes on 16 January 2025, and applies to DC schemes in England, Scotland and Wales.

Defined benefit schemes

The Mansion House speech was surprisingly quiet on the topic of defined benefit schemes, despite some industry speculation as to proposals for surplus extraction, consolidation, or investment reform.

Other proposed changes

The Chancellor also announced a number of proposals to innovate and improve the financial services market, including a new stock market ("PISCES") and a Digital Gilt Instrument ("DIGIT"), along with plans to reform the Financial Ombudsman Service and improve the regulation of financial advice and guidance.

We will of course provide further updates as the two consultations progress, and with any news on next year's Pension Schemes Bill. In the meantime, if you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pensions team or your usual Brodies contact.

Contributor

Juliet Bayne

Partner