Good morning.
My name is Joanna Harley. I primarily look after Insight’s pooled fund offering, but today I have been asked to provide an update on regulations in the pensions sector.
I would like to begin by highlighting that there is no single answer to how pension assets should be invested. On the left-hand side of the slide, we show the asset allocation of private sector defined benefit (DB) schemes. These schemes are generally closed, mature, and well-funded, with guaranteed pension promises. As a result, they typically adopt a relatively low-risk investment strategy. Their portfolios also tend to remain liquid, preserving the option to transfer liabilities to an insurer through a buyout transaction.
Moving across the slide, we see how insurers invest both private and bulk annuity assets. Insurers also follow a low-risk investment approach, but they allocate more to alternative and illiquid investments. This reflects their confidence that liabilities are long term in nature and that they have little need for interim liquidity.
Further to the right are public sector DB schemes, which generally remain open to new members and ongoing accrual. Because of this, taking investment risk can provide meaningful benefits by potentially reducing future contribution requirements if investment returns are favorable.
Finally, defined contribution (DC) schemes, including workplace pensions, SIPPs, and personal pensions, take on investment risk because any upside directly benefits the individual saver.
The way different pension schemes invest reflects both regulatory frameworks and the nature of the pension promises they provide. This makes it important to monitor regulatory developments, particularly the changes being introduced through the UK Pensions Bill, which will be the focus of my presentation.
Before discussing the UK, it is worth briefly considering developments in the Dutch market, which provide an interesting point of comparison. In the Netherlands, DB schemes are currently being unwound, with members and assets being transferred into DC structures as part of a nationwide reform. This transition is scheduled to take place between January 2026 and January 2028.
Ahead of the transition, Dutch DB schemes face even greater pressure to maintain funding levels and hedge risks. However, once assets move into DC arrangements, they are expected to be repositioned to reflect the incentives within a DC framework. In general, this means a higher allocation to growth-oriented assets and a move from lower-risk to higher-risk investment strategies.
This represents a significant transformation in the Dutch pensions market. While we do not expect reforms of this scale in the UK, the UK Pensions Bill is still expected to have a substantial impact.
The bill covers three key areas: local government pension schemes (LGPS) and DB surplus extraction, defined contribution pensions, and superfunds. Across all three areas, the common themes are consolidation into fewer schemes, increased investment in UK assets where appropriate, and improved outcomes for pension savers.
Starting with LGPS, there are currently 86 local government pension schemes in England, covering around seven million members and approximately £400 billion of assets. Over the past decade, the government has encouraged asset pooling, resulting in eight asset pools that currently manage around 75% of LGPS assets.
The government now wants all LGPS assets to be managed through these pools by March 2027 and plans to reduce the number of pools from eight to six. Pools such as Access and Brunel are being wound down, with their assets redistributed primarily to Border to Coast, Central, and LPPI. Going forward, LGPS schemes will be required to obtain principal investment advice from the pools, delegate implementation of investment strategies, and transfer assets to the pools for management.
The government also views LGPS assets as strategically important for supporting domestic economic growth. As a result, schemes will be required to establish approaches to local investment and identify opportunities such as clean energy infrastructure, affordable housing, and SME financing.
Looking further ahead, potential future political developments could bring additional changes. Current polling suggests that future governments may continue to support greater consolidation and centralization of LGPS assets. There may also be less emphasis on ESG-related investments, depending on political priorities.
Turning to defined benefit schemes more broadly, one of the most significant reforms in the Pensions Bill concerns the ability to release surplus while continuing to operate a pension scheme.
Currently, if a scheme generates a surplus, many trustees would aim to transfer liabilities to an insurer through a buyout. In doing so, the surplus effectively becomes part of the transaction used to secure benefits with the insurer. This also transfers future opportunities for surplus generation to the insurer, which then controls the assets.
The new legislation introduces an alternative approach. Rather than pursuing buyout immediately, schemes may be able to remain open and distribute surplus between sponsors and members while retaining assets and continuing to generate future surplus. This creates a cycle where investment returns can generate ongoing value that can be shared repeatedly over time.
In my view, this is an appropriate development. Sponsors have often supported pension promises for many years with limited upside. Members could also benefit through measures such as discretionary inflation increases where these are not already guaranteed.
As a result, pension schemes may increasingly be viewed not only as liabilities but also as valuable assets capable of generating benefits for both sponsors and members through prudent risk-taking.
For example, a scheme pursuing a buyout today might instead continue operating for another decade under a modest growth strategy. A simple illustration would be targeting returns of gilts plus 1% over ten years, which could generate an additional surplus equivalent to roughly 10% of scheme assets. That surplus could then be shared and potentially repeated over future periods.
This approach also supports government objectives. Surplus returned to sponsors could support corporate investment and economic growth, while surplus shared with members could enhance retirement outcomes.
Moving to defined contribution pensions, DC assets now exceed £1 trillion and are roughly evenly divided between individual savings arrangements and workplace pensions. Auto-enrollment, introduced in 2012, continues to support growth in DC savings through mandatory pension contributions.
One notable issue is that many assets leave workplace pension schemes at retirement and transfer into retail arrangements. In contrast, Australia, which has operated mandatory retirement savings for much longer, has developed a more mature framework. Australian contribution rates have gradually increased from around 3% to 12% of earnings, helping reduce reliance on state pensions.
Australia also demonstrates how strong DC savings systems can support long-term public finances. By 2035, it is forecast to have one of the lowest levels of public pension expenditure among OECD countries.
While the UK is unlikely to replicate every aspect of the Australian system, elements of the model are influencing policy development. One example is the new emphasis on value rather than simply low fees. The government aims to assess pension providers based on overall performance and encourage consolidation where schemes consistently underperform.
Additional consolidation measures are also planned. Multi-employer master trusts will need to reach at least £25 billion in assets by 2030 or demonstrate a credible path to that scale. Workplace pension schemes will also be expected to offer default retirement pathways, helping retain assets within workplace arrangements rather than transferring them into retail products.
There is also a continuing push to increase investment in UK assets, although opinions differ regarding the extent to which governments should influence asset allocation decisions.
The DC sector will continue evolving beyond the current legislation. Future reviews will examine whether the current 8% auto-enrollment contribution rate is sufficient and consider the role of Collective Defined Contribution (CDC) arrangements, which share investment and longevity risks across members while avoiding the guarantees associated with traditional DB schemes.
Finally, the bill addresses superfunds. These vehicles allow employers to transfer pension liabilities and remove the legal connection between the pension scheme and the sponsoring company. They operate similarly to buyouts but are generally lower cost.
Currently, Clara is the only active superfund, having completed several transactions since 2023. Superfunds retain any future surplus generated in exchange for underwriting pension liabilities. The Pensions Bill aims to provide greater regulatory certainty and encourage additional providers to enter the market.
Overall, there is substantial change taking place across the pensions landscape. Historically, many UK DB schemes viewed buyout as the natural end point. The reforms now create alternative pathways, including run-on strategies and superfund transfers, both of which may allow pension assets to continue generating value over time.
As the Pensions Bill progresses and additional reviews are undertaken, we expect policy to continue supporting consolidation and increased UK investment, as these objectives appear to command broad political support.
Thank you. I hope this overview has provided some useful insights and I would be happy to answer any questions.
