The government has launched a review of the pensions system, while the Chancellor Rachel Reeves recently met the "Maple 8" group of Canadian pension funds as she urged UK schemes to consider their approach.
Both initiatives are part of a government drive to shake up pensions and could have far-reaching implications for UK real estate investment as they aim to unlock investment, increase saver returns and tackle waste in the system.
On 16 August, the chancellor announced a broader review of the pensions system, led by the minister for pensions Emma Reynolds.
It will initially focus on developing policy in four areas: driving scale and consolidation of defined contribution workplace schemes; tackling fragmentation and inefficiency in the £360 billion Local Government Pension Scheme, including through consolidation and improved governance; the structure of the pensions ecosystem and achieving a greater focus on value to deliver better outcomes for future pensioners, rather than cost; and encouraging further pension investment into UK assets to boost growth.
The Chancellor's roundtable meeting last month with Canada’s biggest retirement fund chiefs in Toronto was clearly part of the wider push.
Canada’s top schemes, known as the Maple 8, include Ontario Teachers' Pension Plan and Canada Pension Plan Investment Board and collectively manage around £1.1 trillion worth of taxpayer-backed pension schemes for public sector workers. They have invested billions in the UK, including in major real estate and infrastructure, such as stakes in Associated British Ports, Westfield Stratford shopping centre, and the redevelopment of the BBC Television Centre in west London.
Reeves said: "I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment."
John Forbes, of John Forbes Consulting, an expert on the pension system, tax and real estate, points out that pension reform was included in Labour's manifesto and the documents published with the recent King’s Speech included more detail on a bill that continues some of the Conservatives' initiatives on defined contribution pension reform, particularly on "value for money".
A huge focus of the full review will be, Forbes says, the consolidation of defined contribution workspace schemes. In a DC scheme, a fund of money is built up from the individual's contributions, those an employer makes and tax relief from the government. Employees can choose their own funds and switch between them. Managers therefore often offer only liquid investments that can be traded daily, which creates a problem for an illiquid asset class like real estate. The market is also highly fragmented with a large number of very small schemes.
Also, the Pension Policy Institute estimates that 96% of DC members are investing in the default option which often does not include a real estate fund. Research from Columbia Threadneedle finds that, on average, 20 years before retirement only 0.7% of a DC portfolio is invested in real estate.
Forbes says: "This can be inefficient and limits the ability to invest in illiquid assets. The previous government saw this [consolidation] being achieved through the master trusts."
Forbes thinks "Collective DC" is also important. Collective Defined Contribution pension schemes are an innovation in the UK pensions market where contributions are collected akin to a DC scheme, but pooled and invested with a view to delivering a sustainable target benefit level, more like defined benefit pension schemes. "I think it is very positive that the government is approaching this via consultation rather than imposing a solution on the industry without buy-in, although I suspect that a big stick will appear if it does not happen voluntarily."
The process of tackling the fragmentation of the Local Government Pension Scheme is "quite hard when you dig into the detail", which is why it has taken quite a while to consolidate the 86 schemes into eight pools, says Forbes.
Local authority schemes were amalgamated into the pools, starting in 2015, to reduce costs and target infrastructure investment, among other priorities. In 2022, government set out targets for LGPS pensions to invest at least 5% of their assets in projects that support local areas, potentially unlocking £16 billion of capital.
"I think that there are pros and cons to pooling further," says Forbes.
Successive governments have suggested the eight current pools should be merged into a single behemoth, with the Chancellor of the Exchequer's visit to Toronto to meet the Canadian “Maple 8” schemes being seen as a model to follow.
Canada's population is half that of England and Wales, and it has the Maple 8, plus other regional and occupational pensions.
"To me, it makes more sense to encourage the completion of pooling in the existing eight pools," says Forbes. "I think that this is a very different situation to the DC schemes."
The value-rather-than-cost initiative comes from the previous government and a separate consultation has already been published, after several others over many years.
"I have regularly described the approach of DC schemes by quoting Oscar Wilde, i.e. 'someone who knows the price of everything and the value of nothing'," says Forbes.
In terms of the review being used to encourage greater investment in UK assets, Forbes says although superficially tempting, this needs to be treated with care.
"Schemes have a fiduciary duty to do what is in the interest of policy-holders rather than funding pork-barrelism. However, removing obstacles to investment in illiquid assets can achieve both."
Real estate investors are still awaiting an agreed solution to the liquidity mismatch for funds for retail investors that invest in daily-traded authorised property funds.
The Financial Conduct Authority has been investigating the issue since March 2017 and an answer has been promised later this year. It previously suggested funds should be required to have notice periods before an investment can be redeemed and consulted on a notice period of between 90 and 180 days.
Forbes says: "We believe that the answer that they are still inclined towards is fixed notice periods as introduced for the Long Term Asset Funds. We do not believe that this is the right answer, although it might be in some circumstances.
"There is an issue for Individual Savings Account eligibility if mandatory notice periods are introduced."