Investors have today outlined a series of recommendations to ensure that reforms undertaken as part of the Government’s Pension Review both deliver better retirement outcomes for the millions of UK pension scheme members and support economic growth.
UK investment managers look after £2.2 trillion directly for UK pension schemes and £1.1 trillion indirectly through insurers. The industry wants to ensure that the UK pensions system is fit for purpose to secure the financial futures of individuals across the UK who will rely on their pensions in later life.
By implementing clearly targeted reforms and improving the attractiveness of UK capital markets for all investors, both domestic and international, investment managers believe that government can build a new consensus to achieve its growth objectives without having to mandate or direct pension capital.
In a series of ten recommendations for the UK pensions market, the Investment Association has called for:
- A focus on ‘sophisticated scale’. Size alone will not set pension schemes up for investment success, there needs to be an emphasis on the importance of strong governance, accountability and appropriate investment expertise as the starting point for delivering the best investment outcomes.
- A cultural change that places long-term outcomes over price when defining value. Ensuring member value through the delivery chain requires both a shift in mindset and a greater focus on the operational issues that are complicating investment allocations, notably daily dealing mechanisms which inhibit access to less liquid or illiquid asset classes.
- More competitive and innovative UK capital markets. The Government needs to address frictions and disincentives in the UK capital markets that affect the behaviour of all investors, including UK pension schemes – this includes the abolition of stamp duty on UK listed equities. Increased UK competitiveness will have a significant impact on capital allocation by both domestic and international investors, and in turn boost economic well-being.
Improved scale and retirement outcomes through increased pension contributions. Scheme consolidation and increasing investment effectiveness, while important, will not on their own move the dial in terms of better investor outcomes in Defined Contribution schemes. This will only happen if contribution levels in the DC market are also increased over time.
- A better retirement income experience. New measures should be put in place both to support pension savers in making retirement income decisions, and to enable a new generation of retirement products that are specifically geared towards the provision of retirement income. This will have benefits both for pension savers and the overall availability of investment capital.
Jonathan Lipkin, Director, Policy, Strategy and Innovation, the Investment Association, said: “Getting the UK’s pensions system right is crucial for the millions who will rely on their retirement income to live comfortably in later life. Our recommendations outline how a focus on sophisticated scale, a pivot from cost to a wider consideration of long-term value, and greater access to more diversified investments, can help achieve better retirement outcomes.
“While pension reform – including higher aggregate contribution levels – can help to create a different dynamic for UK investment, our recommendations emphasise the importance of a broader approach to make the UK more attractive for both domestic and international investors. The investment management industry is fully committed to help drive the process forward, and we welcome the opportunity to engage with government and policymakers.”
Today also saw the publication of the IA’s annual Investment Management Survey, including the latest figures on the UK institutional market.
Key findings show that as of the end of 2023:
- Total UK Assets Under Management (AUM) were £9.1 trillion, rising by 3% over 2023. 73% of AUM is managed on behalf of institutional clients. The largest client group for IA members is pension funds at 32% of AUM, with retail investors accounting for 26% of AUM.
- IA members managed £3.9 trillion in UK institutional client assets globally. Pension and insurance clients make up 82% of institutional AUM.
- UK pension fund assets managed by IA members remained at £2.2trn in 2023, unchanged from 2022.
- The increase in interest rates through 2023 to 5.25% meant that a number of DB schemes could move to full funding positions and sought to transfer scheme risk to insurers – it is estimated that buy-in and buy-out deals reached £50 billion.
- These assets would have moved to insurance clients in IA data, and the share of institutional assets managed on behalf of insurance clients is now 26%, the highest proportion in seven years.
- The IA estimates the size of the UK pensions market at £3.8trn in 2023, which is up 2% from the £3.7trn estimated in 2022.
Commenting on the institutional data, Miranda Seath, Director for Market Insights at the IA, said:
“Institutional assets continue to represent the majority of Assets Under Management in the UK, standing at almost 73%, and assets managed for pension fund clients are 32% of UK AUM, making pension savers our largest client group.
“IA members manage £2.2 trillion on behalf of UK pension scheme members, a figure that is unchanged from 2022. AUM has stabilised as investment managers adapt to the new economic cycle and higher interest rates. This has implications for asset allocation both for young pension savers, where equities must play a greater role in delivering good retirement outcomes, and for those nearing retirement as we see a return to higher bond yields.
“We have also seen structural changes as more DB schemes moved to full funding and transferred risk to insurers in 2023. Indeed, assets managed on behalf of insurance clients is now at the highest percentage of institutional client assets in 7 years. This year’s data shows a return to greater stability and an industry that is adapting to provide good retirement outcomes for pension savers. The new government’s commitment to the twin ambitions of pension reform and economic growth is critical to delivering for tomorrow’s retirees.”
