A Hunt for Growth: Pensioners to the rescue?

In his much trailed Mansion House speech yesterday evening, Jeremy Hunt set out his vision for unlocking the UK’s £2.5 trillion pensions market to provide capital for growth businesses and support the UK economy. Against the backdrop of stubbornly high inflation and mortgage costs hitting the highest level for 15 years, the Chancellor’s vision relies on encouraging pension providers that there is a “win-win” for both their pensioners and UK plc by increasing their investment allocation to UK high-growth companies. He also set out his vision for reinvigorated UK listings and the desire for the UK to be the home for the world’s fastest growing companies. In that regard, he published updates on prospectus reform, dematerialisation and investment research.

The Chancellor acknowledged that his speech only laid out the intended direction of travel, and published no fewer than 14 consultations and policy papers that will need to be worked through before the Autumn Statement. The question is whether, given the likely General Election next year and the Conservative party’s current polling numbers, pensioners will actually be given the opportunity to ride to the UK economy’s rescue.

Pensions

Pensions were front and centre of the Mansion House speech. The Chancellor believes that there is currently unlocked potential for pension funds to stimulate and strengthen UK financial markets.

Defined Contribution

In relation to UK DC Schemes, the Chancellor announced (amongst other proposals):

• The “Mansion House Compact” - a voluntary agreement between nine of the UK’s largest DC pension providers (namely: Aviva; Scottish Widows; L&G; Aegon; Phoenix; Nest; Smart Pension; M&G; Mercer) to aim to allocate 5% of assets in their default funds to unlisted equities by 2030.

  These institutions represent around two-thirds of the UK’s DC pensions market, and the Chancellor believes that this will unlock c.£50 billion of investment in high-growth companies by 2030. In turn, he believes that the package of announced measures could increase pension saver’s DC pots by 12% over their career – delivering £1,000 more a year in retirement.

  This aligns with the Government’s aim to strengthen the UK’s position as a financial centre – however any requirement that investments are made into UK companies is notably absent from the proposals at this stage.

• The Government will encourage the establishment of further new Collective Defined Contribution Funds (CDC Funds), following on from the establishment of the Royal Mail Collective Pension Plan, which can invest more effectively by pooling assets.

  The Government proposes to publish secondary legislation to permit more providers to set up CDC Funds – which essentially pool risk between DC pension savers and present an alternative option for pension provision beyond traditional DB and DC schemes.

• A call for evidence on how the Government may be able to support pension trustees to develop the knowledge and skills to invest in the full breadth of investment options – including those which the Chancellor particularly wants them to invest in.

Defined Benefit

Turning to the world of DB Schemes, the Chancellor highlighted:

• Further plans to encourage DB schemes to consolidate – in the belief that the economies of scale provided by consolidation might encourage more sophisticated investment strategies, including investment in productive finance.

  First, the Government will look to re-energise the commercial consolidation market. Currently, there is only one established player in the market – Clara. The Chancellor wishes to develop a supervisory regime for these consolidators which will encourage the market to grow.

  Secondly, and perhaps more interestingly, the Chancellor is keen to explore an idea first mooted by the Tony Blair Institute that the Pension Protection Fund’s (PPF) remit should be expanded. Rather than simply being a safety net for pensioners whose employers become insolvent, the PPF may act as a Government-backed consolidation vehicle. This would be a significant departure for the PPF, and likely require substantial amendments to the current “moral hazard” regime which currently protects, and policies entry into, the PPF.

• The Chancellor has also called for evidence on whether DB pension schemes could shift their asset allocations into more productive asset classes, stemming the longstanding trend to move away from equities and into gilts. In its call for evidence, the DWP asks what more can be done to incentivise sponsoring employers and trustees to invest more into return-seeking assets – and what barriers to doing so might need to be removed.

  It should be noted that this call for evidence makes no mention of the separate move by the DWP and Pensions Regulator, as set out in the draft DB Funding Code and associated regulations which the Government aims to finalise next year, to mandate DB schemes to invest towards a substantially de-risked funding and investment strategy – hastening the flight to gilts. This inconsistency will need to be resolved.

Local Government Pension Schemes

In an attempt to lead by example, the Chancellor has also extended his proposals beyond private sector DB schemes and has announced the opening of a consultation in relation to Local Government Pension Schemes.

The consultation tables proposals for all Local Government Pension Schemes to pool their assets into LGPS pools, with the aim that each pool would have in excess of £50 billion in assets. The deadline for this consolidation would be March 2025 with the aim to double existing investments in private equity by LGPS to 10%, citing the potential to unlock £25 billion by 2030.

Comment

The Government states that its aim is to 1) secure best outcome for savers, 2) prioritise a strong and diversified gilt market, and 3) strengthen the UK’s position as a leading financial centre. These pension reforms attempt to do just that. It will be interesting to see the results of these consultations and whether they result in the “evolutionary” reform that the Chancellor is envisioning.

To discuss further, please contact Ed Smith.

Capital markets

Listings

In his speech, the Chancellor promised a new regulatory regime for prospectuses giving companies the flexibility to raise larger sums from investors more quickly. A near final draft of the statutory instrument on public offers and admission to trading regulations published in December 2022 as part of the Edinburgh reforms has now been published giving rise to the hope that this part of the reforms can be concluded fairly swiftly, given that there are limited substantive changes to the instrument. The key developments in the new draft are that offers of unlisted securities cannot exceed £5,000,000 unless made by means of a regulated platform and, to encourage international issuers, prospectuses may contain financial information in Canadian, Chinese, Japanese, Korean, and US GAAP if certain disclosures are also included in the prospectus.

Dematerialisation

The interim report of the Digitisation Taskforce has been published as part of the Mansion House package of reforms. The recommendations are as follows:

• Legislation should be brought forward, and company articles of association changed, as soon as practicable to stop the issuance of new paper share certificates.
• The Government should bring forward legislation to require dematerialisation of all share certificates at a future date, to be determined as soon as possible.
• The Government should consult with issuer and investor representatives on the preferred approach to ‘residual’ paper share interests and whether a time limit should be imposed for the identification of untraced Ultimate Beneficial Owners (UBOs).
• Intermediaries should have an obligation, as a condition of participation in the clearing and settlement system, to put in place common technology that enables them to respond to UBO requests from issuers within a very short timeframe.
• Intermediaries offering shareholder services should be fully transparent about whether and the extent to which clients can access their rights as shareholders, as well as any charges imposed for that service.
• Where intermediaries offer access to shareholder rights, the baseline service should facilitate the ability to vote, with confirmation that the vote has been recorded, and provide an efficient and reliable two-way 3 communication and messaging channel, through intermediaries, between the issuer and the UBOs.
• Following digitisation of certificated shareholdings the industry should move, with legislative support, to discontinue cheque payments and mandate direct payment to the UBO’s nominated bank account.

These are ambitious recommendations which are to be welcomed. We note that primary legislation will be needed to implement many of these proposals as well as technological changes so it will be interesting to see whether the commitment and time needed will be available during the lifetime of the current Parliament, noting that the report envisages a further 6 month consultation period before the final report is delivered to the Government.

Investment research

In his speech, the Chancellor said that the Government has accepted all the recommendations in Rachel Kent’s report on investment research. Those recommendations include:

• Creating a research platform (taking inspiration from similar schemes overseas) which will host freely available research on publicly traded companies, chiefly smaller cap companies. The funding arrangements for this would need to be worked out but the report suggest they could include funding from issuers, exchanges, financial services firms, the government or a levy on market participants when they purchase shares.
• Making bundling/unbundling of research charges optional and so giving everyone the freedom to organise this in the way that works best for them. The recommendation proposes that buy-side firms should still be fully transparent on this, including making appropriate disclosures to clients when the client fund the cost.
• Considering a liberalisation of applicable rules in order to allow greater retail investor access to research.
• Exploring whether academic institutions could be a potential research resource to help address any shortfall in analysts numbers in particular sectors.
• Support issuer-sponsored research and encourage the industry to develop a voluntary code of conduct to give the market confidence.
• Streamline and simplify the web of overlapping rules and requirements that apply to investment research and consider whether a bespoke research regime would be better.
• Reconsider the Financial Conduct Authority’s (FCA’s) UK reforms.

On the whole, these are welcome recommendations. Optionality around bundling/unbundling appears to be the preferred approach for many in the industry, although there are also important dissenting voices it has to be said. Some recommendations are clearly aimed at the small to mid-cap part of the market and Rachel Kent and team have listened carefully to feedback in that area. We think recommendations 6 and 7 are particularly welcome as the current set of rules are arguably quite unwieldy in places. It is also interesting to see that the report and now the Government are keen to open up research for retail investors. There are a number of regulatory obstacles to that and it remains to be seen whether the FCA will be willing to create a way through.

Comment

Following on from the Edinburgh reforms, the Government has maintained momentum in setting out further detail around its wide-ranging and ambitious reform agenda for UK capital markets. Changes to the prospectus regime, support for digitalisation and the provision of investment research all play a part in creating a more efficient capital markets that will help provide the right regulatory environment to reinvigorate the capital markets.

To discuss further, please contact Jamie Corner, Caroline Chambers or Alex Ainley.

Funds

From a funds perspective, the Chancellor noted:

• The DWP's consultation response – together with the Pensions Regulator and the FCA - on the Value For Money framework in which the DWP clarifies its view that investment decisions should be made on the basis of long-term returns rather than simply on cost – the Chancellor also warned that pension schemes face being wound up by the Pensions Regulator if they are found not to be achieving the best possible outcome for their members (See here for a summary of the Government’s response to the consultation).
• That a roadmap would be set out to encourage Collective DC funds, which he referred to as “a new type of pension fund” (see point 2 in the section headed ‘Defined Contribution’ above).
• The importance of ensuring that schemes are able to access “a wide range of investment vehicles that enable them to invest quickly and effectively in unlisted high growth companies” – the Government will be considering bids received as part of the LIFTS competition, bidding for up to £250 million of Government support. (See here for Simmons & Simmons’ response to the LIFTS consultation and here for a summary of the Government’s response to feedback received).
• That the Government will explore how and whether it should play a greater role in establishing investment vehicles, testing options in the next few months to open investment opportunities in high-growth companies to pension funds.

To discuss further, please contact Matthew Jones.

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