The chancellor, Jeremy Hunt, is poised to announce plans to merge workplace pension schemes and release up to £75bn of retirement funds for fast-growing startups, in a move that could accelerate plans to create the next Silicon Valley.
The proposals, aimed at mobilising investment from the UK’s £2.5tn pensions sector, are due to be outlined in a speech to top executives and MPs in central London at the lord mayor’s annual Mansion House dinner on Monday evening.
Hunt will say that the government will push for consolidation of the UK’s wide range of pension schemes – including final salary pensions – in order to pool their funding and create better returns for future retirees.
He will also confirm that the Treasury has struck a deal with nine of the largest pension providers that would result in firms earmarking 5% of retirement funds towards private investments.
The government will create new investment vehicles that would give future retirees a stake in homegrown private companies – including in fast-growing fintech and biotech startups – that have increasingly snubbed the London Stock Exchange and turned to foreign investors for cash.
The reforms are meant to support wider government plans to attract more business investment, and come months after Hunt reiterated his ambitions for the UK to become the next Silicon Valley.
The Treasury claimed the Mansion House reforms would not only help burgeoning industries, but could result in higher returns for workers’ retirement funds.
While the UK’s auto-enrolment programme – which has made workplace pension contributions compulsory for most employees – has helped the UK become the largest pensions market in Europe, leading to savings of £115bn in 2021 alone, Hunt believes investment opportunities are being missed.
The government believes the reforms could translate into a 12% bump in pension returns for the average earner who starts saving at 18 years old.
“British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for typical earners over the course of their career,” Hunt is expected to say. “This also means more investment in our most promising companies, driving growth in the UK.”
The Treasury confirmed it had struck an agreement with large pension fund managers, including Aviva, Scottish Widows and Legal & General, that will see 5% of assets in their default pension funds invest in private and high-growth companies.
The so-called “Mansion House compact” – which was also been signed by Aegon, Phoenix, Nest, Smart Pension, M&G and Mercers – could release £50bn from defined contribution pension funds by 2030 if other pension schemes follow suit.
Hunt will ramp up the consolidation of local government pension schemes over the next two years and double their investment in private equity investments to 10%, potentially unlocking another £25bn by 2030.
The government will also encourage defined contribution pension schemes – which do not guarantee a set income at retirement and are the default plan for most UK workers – to pool their cash, including in a new “superfund”.
While consolidation would be voluntary, any schemes that failed to achieve the “best possible outcome” for its members would be wound up by the pensions regulator and merged with more successful peers.
The Treasury said analysis showed a 46% difference in returns between the best and worst performing pension schemes, meaning that savers with a pot of £10,000 could have missed out on £5,000 over five years.
Industry players said they largely welcomed the reforms but warned they were waiting for details.
Tom Selby, the head of retirement policy at the broker AJ Bell, cautioned that the fall of star fund manager Neil Woodford, who invested heavily in private companies which were difficult to sell off quickly, showed “the challenges big investments in illiquid assets can have, and investors will not thank the government if this policy hits the value of their retirements pots”.
Speaking at the same event, Andrew Bailey, the Bank of England governor, was expected to signal further interest rate pain was in store for mortgage holders and businesses, as he said Threadneedle Street had to “see the job through” on reducing inflation.
