On Monday 10 July, the UK chancellor gave his much-anticipated Mansion House report which, as expected, announced some reforms which will impact the pension industry, says Steve Berridge, technical services manager, IFGL   

The UK Pension market, collectively worth £2.5 trillion, is the largest in Europe. In his speech, the chancellor claimed his reforms could unlock an additional £75 billion for high growth benefits and talked about a £1,000 per year boost in income. So, what are these reforms?

The chancellor is concerned at the level of pension fund investment held in gilts and does not believe that the investment potential of the huge sums held within UK pension funds is being fully realized.  He sees the potential for pension funds to assist with the development of promising high growth companies.

An agreement has been brokered between nine of the largest defined contribution pension schemes, to allocate 5% of assets held in their default funds to unlisted equites, by 2030.  

These providers represent over £400bn in assets and the majority of the UK's Defined Contribution workplace pension market. It is hoped all UK defined contribution schemes will follow.

What are the pros and cons?  Well, there is certainly a good argument for using the vast reserves held in pension funds to stimulate longer term, more growth-based investing.

There is a feeling that the UK stock market has lost its way over the years, becoming more risk averse and losing its allure to the more capital hungry investor. Equally there is a feeling that Britons are potentially losing out on income potential in retirement because their collective investments are held in more cautious and risk averse assets.

On the downside, some commentators have been asking the basic question, "what happens to someone's pension pot at retirement, if some of the underlying investments are held in illiquid assets which have gone bad". 

These questions do not directly affect the more niche UK SIPP market for now. It will be interesting however, to see how this develops.

Historically SIPPs were a popular vehicle for investors with an adventurous temperament to experiment in the more speculative investment areas, with the result of some fairly spectacular and high-profile losses and subsequent due diligence claims, which in extreme cases have seen small SIPP providers go bust.  

The FCA regulatory regime certainly no longer encourages anything which is not a standard investment.

We will be watching with interest how this topic develops and what trend the UK pension industry takes as we move into the second half of the 2020s!!

By Steve Berridge, technical services manager, IFGL Pensions.