Jeremy Hunt, UK’s Jeremy Hunt plans pension reform to unlock billions for investment

Chancellor Jeremy Hunt is set to unveil a new package of growth reforms at the autumn statement next week.

Two people familiar with the plan say that the Pension Protection Fund (Pension Protection Fund) will be given new power to consolidate small retirement schemes. According to the two people who declined to be named, the aim is to allow funds to make large, transformational investments within the UK.

The government of Prime Minister Rishi Sunder hopes that the measures will help close the investment gap between the UK and Europe, as well as lift Britain’s stagnant rate of growth — which the Bank of England predicts will remain static next year. The Conservative Party would be able to better tell the story of economic growth before the next general elections, which are due in January 2025. Sunak’s Conservatives are lagging in opinion polls by around 20 points.

Hunt has said that growth is his top priority for the autumn statement. However, with limited spending room he’s trying to attract private sector money. Treasury declined to make any comment.

The chancellor received a £50 billion (62 billion dollars) investment commitment from defined contribution pension plans in July to invest into startups and infrastructure.

The defined-benefit sector, which has £1.2 trillion in assets under management — more than twice the amount of the defined-contribution sector — is another source of funding. However, because these programs are usually closed to new participants, they tend to invest their funds in low-risk assets, like government bonds.

In the past two decades, falling interest rates have led to a steady erosion of investment capital. This was due to funding top-ups that were used for the purpose of filling ever-growing deficits in defined benefit plans. Since 2021, the sharp increase in interest rates has reversed this dynamic and created around £70billion in surpluses.

The employer assumes all investment risks in defined-benefit plans. The younger generations are more likely to have defined-contribution pension plans, where the members take on the investment risk.

Hunt’s reforms will allow UK businesses to invest surpluses from defined-benefit pension plans – above a buffer of protection – in projects or to buy back shares.

Steve Webb, a former Liberal Democrat Pensions Minister who is now a partner at Lane Clark & Peacock said that “the message about surpluses” has landed. LCP was among the members of the industry that suggested the model.

Hunt would have to lower the 35% tax charged when funds are withdrawn and offer 100% protection for trustees under the PPF, in exchange of a “super premium” paid by employers. The PPF is funded through the industry.

The people stated that although the decision would be announced next Monday, the government will launch a consultation to determine the amount of buffer protection, tax rate and PPF premium. The people also asked what would happen if the protective surplus was eroded or if a sponsoring firm went bankrupt.

Hunt will announce that the PPF, which already manages £35 billion , will consolidate smaller defined benefit plans. This will add at least £20 billion  to the existing £35 billion.

Investment risk is higher for the PPF than other defined-benefit plans, as it takes on failed plans in order to ensure that members get 90% of entitlement. Around one-third is invested in private equity, credit and infrastructure.