Spring Budget puts more pressure on defined contribution pension schemes

Although last week’s Spring Budget didn’t contain any huge surprises for pensions, one proposed area of reform caught my eye and raised a number of questions.

The Government is keen to build on its policy to ‘channel more capital into equity markets in the UK’. Although pensions auto-enrolment has driven huge growth in the amount invested by UK pension funds, the Chancellor noted in the Budget that across the pensions industry as a whole, investment in UK equities has fallen to around 6%. To improve this figure, the Government intends to require, by 2027, defined contribution (“DC”) pension schemes to publicly disclose the breakdown of their asset allocations, in particular how much they invest in UK equities compared to overseas.

In addition, in line with the work the Government is doing with the FCA and the Pensions Regulator (“TPR”) on the Value for Money pensions framework, if schemes ‘persistently offer poor outcomes for savers’, the FCA and TPR will have the ‘full range of regulatory powers available’, including closing a scheme to new employer entrants, and where necessary, winding up the scheme.

The DC pension industry is no stranger to ever increasing reporting requirements. Back in 2021, regulations introduced a requirement on schemes to report on the extent to which they were identifying, assessing and managing climate risk. It is clear that the Government wants to encourage pension schemes to invest in a way that supports its own goals and the public’s priorities.

However, it does not want to achieve this by imposing strict investment requirements on DC pension schemes and providers or by relaxing the principal obligation on trustees to obtain the best return for members. Instead, it wants to place the responsibility firmly at the door of the schemes themselves. It is hoping that its new reporting requirements will invite greater public scrutiny on pension scheme investments and exert moral pressure on them to conform to society’s expectations.

There are a number of questions that this announcement gives rise to:

• How will schemes balance the driver for investment in UK equities against seeking to invest in assets which will provide the best return for members?
  Pension scheme investment is already a challenging task, navigating best outcomes for members, and with factors such as ESG and EDI to consider.
• Will the requirement to disclose go far enough to actually change investment allocations?
  Or, will this simply be seen as another reporting obligation.
• Will schemes become more risk averse in light of the proposed powers of TPR and the FCA to close down schemes for persistent poor outcomes? How will ‘poor outcomes’ be determined?

In time, I expect we'll see the answers to these questions.