Mansion House speech 2024: What Labour’s pension reforms mean for your retirement plans

Considering Chancellor Rachel Reeves called the announcements made in her first Mansion House speech the “biggest pension reform in decades,” it’s flown a little under the radar.

Amongst talk of interest rate cuts and the US election, Labour’s pension reforms may not have created the same level of headlines, but they have the potential to make a far bigger impact to individuals over the long term.

As we discuss here, the Chancellor’s plan is a key step in Labour’s pre-election promise to increase economic growth through domestic investment, and it’s a continuation of the pension sector shakeup that has been occurring for years.

There are plenty of positives for retirement savers, such as the potential for lower fees, as well as some risks to keep an eye on.

There were a wide range of details in the speech, but arguably the biggest was the announcement of a merger of 86 council pension schemes into one, and consolidation of small workplace pensions into a few pension “megafunds.”

The Pension Schemes Bill, which will be tabled in 2025, sets out to increase efficiency in the pension sector as well as driving increased investment into major infrastructure — a challenge for small schemes with relatively limited funds under their administration.

It’s a plan that takes its cues from global pension systems, such as those in Australia and Canada.

Reeves said, “Australian pension schemes invest around three times more in infrastructure investment compared to defined contribution schemes in the UK and 10 times more in private equity – including in high-growth businesses – compared to the UK.

“One of the key reasons for this is the much larger size of their funds. While our pensions landscape remains highly fragmented, that means many of our pension funds do not have the capacity to invest at the scale required.”

Essentially, the Chancellor is aiming to consolidate the wealth of the UK’s pensions sector, putting schemes in a better position to invest in national infrastructure projects. If successful, it has the potential to reduce pension operating costs and to drive investment returns while also delivering investment into the broader UK economy.

The second big implication for Labour’s pension reforms is the streamlining of local government pension administration across the country.

Andrew King, retirement planning specialist at Evelyn Partners says, “Right now you’ve got pension administration being replicated in 86 councils. You’ve got 86 sets of investment managers, 86 teams of administrators and all the infrastructure needed to support all these people.

“This is going to be a huge cost-cutting exercise across the pension sector. For pension members, that’s going to drastically reduce the costs in running their funds. However, those employed in local government pension operations could be at risk of losing their jobs.”

As more consolidation happens, competition becomes fiercer between a shrinking number of major providers, putting further pressure on margins and potentially snowballing into even more consolidation.

Lower costs for members, higher levels of competition and access to bigger and potentially better investment options all sound like very positive changes, but what are the downsides and risks that come with these plans?

Big investments could increase investment risk

One of Reeves stated aims with the reforms is to allow pension funds to invest in large scale infrastructure projects and high-growth businesses. Of course, big investments can come with big risks. Infrastructure projects can suffer cost blowouts or delays, and growth stage businesses can be volatile.

The high capital cost of these projects also means the need to allocate large sums to participate.

Not only that, but the private nature of these investments means that valuations can be infrequent and hard to quantify, making the calculation of a true investment return difficult. How much is railway asset worth when it is only 25% completed and over budget by 15%? Keep in mind that these projects can take many years to complete.

King says, “Everyone is likely to get better value for money, from pension fund members to the government, but the investment aspect will become a little more opaque from the member’s point of view.”

Increased UK investments could reduce diversification

Another potential risk of Labour’s pension reforms is the concentration risk that may come from a push for greater levels of domestic investment. Taking Australia as an example, the average pension fund member there has 23% of their retirement savings investment into shares listed on the Australian Stock Exchange (ASX).¹

At the same time, the ASX makes up just 1.6% of the global stock market value. ² This represents a significant overweight position in Australian shares for retirement savers. If the UK was to follow a similar trend, it could represent a risk should the UK market underperform.

For people who don’t work in the local government sector, it can be easy to dismiss these changes as irrelevant. That could be a mistake.

King says, “Pension schemes are going to be having a lot of discussions off the back of these announcements and we are probably going to see quite a lot of amalgamation and change over the next few years.

“The risk for individuals is that as their pension scheme gets merged or swallowed up, the features, benefits or investment options shift away from the choices they originally made. It’s going to be important to keep a close eye on this, or even consider a more hands-on approach through the use of a private pension like a SIPP, personal pension or stakeholder pension if it’s appropriate.”

Any investments, including private pensions, can go down as well as up and you may get back less than you originally invested. Investors should also check the details carefully before making any changes to their workplace pensions. Transferring from an employer scheme to a private scheme could result in a loss of guarantees or benefits, and your employer may not be able to pay into a private pension.

To navigate the expected changes in the pension sector, it’s important to take a proactive approach. Investors should have a clear understanding of their retirement goals and objectives and know how their pension fund and investment choice is aligned with them.

It’s a complex area, and one where professional advice can provide significant benefits.

Pension choices are a perfect example of the importance of collaboration between your financial planner and investment manager. At Evelyn Partners, we’ve seen the benefits a joined-up approach can bring, which is why we offer a combined wealth management service.

It’s a personal relationship with a financial planner to guide your strategy and an investment manager to manage your portfolio, with your goals and objectives at the centre.

You can book a complimentary consultation online or call 020 7189 2400.

¹ The Association of Australian Super Funds, Super Statistics, October 2024

² Securities Industry and Financial Markets Association, Research Quarterly: Equity and Related, January 2024