Key items for your agenda in 2025
Our standout items
UK defined contribution pensions
What’s happening?
Phase one of a Pensions Review initiated by the new UK government is considering how to bring about greater investment of DC pension scheme assets in the UK. The interim report was published in November 2024, with the final recommendations due early this year.
Phase two concerns how to improve outcomes for pension savers, including pension contribution adequacy as well as long-term investment performance, but this has reportedly been postponed indefinitely.
Separately, new requirements are expected for workplace DC pension schemes to assess, compare and report on the value for money their default investment funds offer to members. This will cover more than investment returns and charges: it will also require schemes and providers to consider the classes of asset in which they invest and service quality. The FCA has consulted on this and the outcome is awaited.
So what?
UK DC pension schemes offer very significant potential for productive investment for the benefit of the UK economy, which is not currently being realised.
The government considers that greater consolidation will lead to more assets being invested productively, including in UK private markets and infrastructure, and better outcomes for members. Larger schemes are generally managed more professionally and this, together with their scale, means that they tend to invest in a wider range of asset classes and on better terms.
With this in mind, the government proposes to reduce the number of workplace pension providers available to employers for compliance with their automatic enrolment duties. The reduction would be brought about by imposing a minimum asset value requirement for each master trust’s and group personal pension provider’s default investment arrangement, and a limit on the number of different default arrangements they may offer. This would not be in place until 2030 at the earliest, and there may be a transitional period. See What’s Happening in Pensions Issue 113 for more detail.
The value for money initiative is designed to make other DC pension schemes think hard about whether their default investment offerings are up to scratch. It also means further pressure on small schemes to consolidate. See What’s Happening in Pensions Issue 111 for more detail.
Local Government Pension Scheme (LGPS) (England and Wales) investment
What’s happening?
Phase one of the Pensions Review is also considering how investments by LGPS funds in England and Wales can better benefit the UK economy.
Existing initiatives have set greater expectations of asset pooling by the various funds that make up the LGPS and of greater investment in private capital. But only around 39% of the nearly £400 billion LGPS assets have so far been pooled and the government is not satisfied with progress. It has therefore decided to mandate full asset pooling.
What does this mean for me?
As for DC pension schemes (see above), the government sees further consolidation as a way to improve the performance of LGPS funds and to increase investment in UK private markets and infrastructure, which are seen as more productive. The 86 funds which make up the LGPS in England and Wales will therefore be required to pool their assets in new ‘megafunds’. Each LGPS fund’s administering authority will be required to specify a target for investment in their local economy, with 5% given as an example. The timescale for implementing these plans is not clear. See What’s Happening in Pensions Issue 113 for more detail.
This initiative has been strongly influenced by models in Canada and Australia, where they see far greater pension fund investment in infrastructure than is seen in the UK.
We agree that consolidation into ‘megafunds’ could help to improve value for money and increase ‘productive investment’. But the reduced competition could also be detrimental to value as well as creating a barrier to new providers and, therefore, market innovation. The government doesn’t currently intend to mandate any degree of investment in private markets, or the UK generally, so if schemes and providers are to help with the economic growth agenda they will need to be able to decide that such investment is financially attractive.
Susie Daykin
Head of Pensions
Other things to keep a close eye on
New ILPA quarterly reporting templates
What’s happening?
New ILPA quarterly reporting template and a new performance template, designed to standardise return calculation methodologies in private equity, were released this week following consultation with the industry last year. The templates are supplemental to the quarterly reporting by sponsors. This is the first update to the reporting template since its original release in 2016. The overarching structure of the 2016 reporting template remains unchanged, however the new reporting template broadly includes enhanced reporting on external partnership expenses and expenses allocated or paid to the investment adviser and related persons, and modifications are generally speaking no longer permitted to the template. The new performance template is the first of its kind in the industry and there are two versions depending on how sponsors calculate gross performance and call capital. The templates aim to enhance transparency and consistency in the way in which sponsors are communicating with their investors. Our briefing on ILPA’s Quarterly Reporting Standards Initiative provides more information on the background to the initiative and the changes to the reporting templates.
So what?
Sponsors (irrespective of size) who adopt the ILPA reporting templates have until the beginning of Q1 next year to implement the new templates for their new funds (i.e. funds commencing operations on or after 1 January 2026) and, in respect of the new quarterly reporting template only (the performance template only applies to new funds), those funds still in their investment period during Q1 2026. The first quarter the new reporting template would be used is after 31 March 2026 and the first delivery of the performance template would be after 31 March 2027 (i.e. four fiscal quarters after the commencement of operations with data being captured from Q1 2026). This means that existing funds still in their investment period in Q1 2026 will need to change how they report to investors (although they won’t need to provide the performance template) and sponsors may end up using two different ILPA reporting templates unless they adopt the new reporting template for all of their funds and transition away from the 2016 reporting template for funds that are no longer in their investment period as of Q1 2026. Also, sponsors who adopt the Invest Europe Reporting Guidelines should keep an eye out to see what Invest Europe decides to do with its Guidelines as they will no longer be consistent with the ILPA reporting requirements given the changes to the ILPA templates. We will keep you updated.
ILPA’s new reporting template and an additional performance template are hot off the press – the new performance template is the first of its kind in the industry and is intended to standardise return calculation methodologies (with there being 2 versions depending on how sponsors calculate gross performance and call capital). The changes shouldn’t come as too much of a surprise as ILPA has been engaging with the industry on the updates. Whilst investors will welcome the changes as they are increasingly focused on enhanced transparency from sponsors, in particular the way in which they report to investors on their fund investments, sponsors who adopt the ILPA reporting templates will have to change how they report to their investors for their funds still in their investment period as of Q1 2026 (and potentially for their older funds if they wish to use only one form of ILPA reporting template rather than both the new and 2016 version), although the performance template only applies to new funds, the first delivery of which would be after 31 March 2027.
Tosin Adeyeri
Partner
New private intermittent trading platform (PISCES)
What’s happening?
The UK government has confirmed that it will establish the Private Intermittent Securities and Capital Exchange System (PISCES). This will allow intermittent secondary market trading of shares in companies incorporated anywhere in the world, provided the shares are not already admitted to trading on any public market.
For the first five years, PISCES will operate on a trial basis in a “sandbox”, meaning that models and practices, which would not otherwise be permitted under the existing legal and regulatory framework, can be tested in a live environment. The UK government will then use the evidence from the sandbox to decide if and how to legislate to make PISCES a permanent feature.
The FCA is consulting on the regulatory framework for PISCES. Only recognised investment exchanges, or persons who have certain specified permissions from the FCA, will be eligible to operate a PISCES platform within the sandbox. It will be up to operators to determine the requirements which will need to be satisfied before shares in a company can be traded using their platform, including relating to corporate governance.
What does this mean for me?
PISCES is an exciting development for the private capital sector, potentially enabling private and public markets to work together to enable smaller companies to access capital and liquidity, and investors to access the broadest range of high-quality assets.
The UK government is consulting on draft legislation establishing the PISCES sandbox and intends to introduce final legislation by May 2025 following which the FCA will publish its final rules.
PISCES’s innovative structure has potential and it is encouraging to see the UK government and regulators thinking outside the box when it comes to implementing strategy to reform and reinvigorate UK capital markets. Now that the FCA has published a comprehensive consultation detailing how PISCES will operate, we can see that some hurdles to the regime remain. Whether PISCES is ultimately successful will depend upon whether these can be worked through, either before launch or during the “sandbox” testing period.
Aaron Stocks
Partner
UK defined benefit pension schemes funding and investment
What’s happening?
New rules for UK DB pension scheme funding and investment now apply where a scheme valuation is being undertaken as at a date since 22 September 2024, i.e. valuations being undertaken now and over the coming few years.
The original proposals focused on benefit security for members, generally meaning more insured buy-ins/outs or investment in gilts and corporate bonds, as compared with investment in equities and productive assets. The final rules moved away from this to only a limited extent, in particular for the small number of schemes that are still open to new members. For more detail, see our February 2024 briefing.
It is not clear whether the new UK government will take forward initiatives begun by the last Government: these were intended to encourage well-funded DB pension schemes to run-on, rather than transferring risks to an insurer, and to consolidate smaller schemes. The proposals included making funding surpluses easier for employers to access and establishing a public consolidator into which eligible schemes unattractive to insurers and commercial consolidators can transfer. For more detail, see What’s Happening in Pensions Issue 107.
So what?
If schemes that can transfer risk are incentivised to run-on instead, this may mean greater investment by pension schemes in equities, including unlisted equities. In addition, if pension scheme funding surpluses are easier for employers to take out of the scheme (and now with a lower tax charge) then this reduces some of the current disincentives on employers to fund the scheme well as part of a run-on strategy, instead of transferring the risk to an insurer.
The last government considered that a professionally managed public consolidator would invest in a broader range of assets than the small schemes transferring in to it.
