Today is the closing day for submissions to the Government’s Pensions Investment Review: Unlocking the UK pensions market for growth – GOV.UK. Many pensions experts have been sharing their comments with about this important consultation, which sets out proposed reforms to deliver scale, accelerate consolidation and drive a focus on value over cost in the Defined Contribution (DC) workplace pensions market. It also explores other changes.
Kate Smith, Head of Pensions at Aegon comments on the Pension Investment Review consultation saying: “We support the overriding aims of the Government’s pension consolidation and scale proposals including encouraging a wider consideration of investment classes. We particularly support the proposals to enable bulk transfers of members of contract-based pensions without individual consent. We see this as a lynch pin to the success of these proposals and other measures such as the Value for Money Framework as without them, it’s extremely hard to facilitate beneficial transfers en masse. As such this should be a priority for the Government and FCA to enable providers to start rationalising their default fund estates now and improve members’ outcomes.
“However, we do have some major reservations about how radical some of the proposals are and the risks they create. Scale shouldn’t be the ultimate goal, but rather a means to the end. Also, it is the provider or scheme size, not the fund or arrangement size, which is likely to lead to better governance, economies of scale and improved bargaining power on price of investment. Many multi-employer arrangements are already using their scale to meet the government’s objective of investing more in productive assets, including through LTAFs.
“Setting hard and fast rules on the minimum scale to be achieved by multi-employer schemes and a maximum number of defaults per provider by a specified date is extremely ambitious, unduly risky and possibly unachievable due to capacity issues. Consolidation of workplace schemes into multi-employer schemes takes many months, depending on the complexity of the transfer, taking up scarce and valuable resources. This could easily lead to a capacity crunch if too many schemes need to consolidate at the same time.
“In terms of greater investment in UK private assets, it’s also questionable whether there’s enough good quality supply to invest in, something the Government will need to monitor closely to avoid simply inflating prices.
“This isn’t the only pension reform the Government is looking to implement in the next few years. There’s a number of other policy measures on the go, including the Value for Money Framework and small pots consolidation. There’s an urgent need for the Government and regulators to sequence the changes in a way that works best to deliver objectives while also making sense to individuals and avoiding creating inefficiencies or capacity crunches for schemes and providers.
“The measures being considered could fundamentally change the pensions market so that it looks very different in 10 years’ time. This could be welcome if it meets the government’s objective of greater investment in productive assets, including in the UK, and crucially improves members’ outcomes. But there is no guarantee of this. The risk is that scale could be counterproductive if it dampens competition and stifles innovation.”
Jamie Jenkins, policy director at Royal London has also shared his response to the consultation as follows: “Royal London is supportive of the Government’s agenda for pension investments to contribute further to economic growth, but we do not believe that setting hard targets is the best approach for the Government to achieve its objectives.
“While greater scale will enable greater investment in private and illiquid assets, we don’t believe that scale alone would encourage or incentivise such a move. Equally, there is nothing inherent within scaling up investments that would create a greater home bias for listed equity investment.
“A more direct route for Government to achieve its aim would be to focus instead on the investment mix deployed by schemes, which we believe will naturally lead to greater scale. This could be achieved through careful design of the Value for Money (VfM) framework, currently being consulted upon by regulators. That could be shaped in a way that places emphasis on access to illiquid, longer-term assets – such as critical infrastructure – and this will almost certainly drive a higher UK investment bias. However, to achieve a material shift in thinking, the framework would need to look beyond short-term returns and consider the longer-term benefits.
“This is a perfect opportunity to refocus the timeframe over which we consider the value of investing for retirement which is, after all, several decades in duration.”
Commenting ahead of the Pensions Investment Review consultation, Unlocking the UK Pensions market for growth closing, Paul Waters, Head of DC Markets, says: As a firm, we are broadly supportive of the drive to create larger pension arrangements with the scale to better access investment opportunities like private markets. This can deliver better member outcomes as outlined in the consultation. We do, however, believe that it is important that any requirement to consolidate does not stifle innovation in the DC marketplace and therefore are not supportive of mandating a threshold such as £25bn.
“The DC market is moving forward quickly, and recent history has shown smaller, more nimble organisations can innovate and deliver positive change. It will be important not to lose this innovation. At the same time, we understand the government’s aim to achieve scale, and in tandem, to drive investment into UK productive assets. Scale (at some level) is required to invest in private assets but it does not in itself compel investment into these areas – it is a necessary but not sufficient condition for investment in UK productive assets. Megafunds are an important part of this solution and have a key role to play in helping to grow the UK private market investment.
“The consolidation journey that the pensions industry is on already, together with the ideas proposed in the consultation, will result in a number of very large arrangements with many of the attributes required to deliver the investment desired. We do not think it will be necessary or desirable to eliminate smaller arrangements (£5bn plus), who are large enough to do private market investments in some form, deliver good value for members and will only make up a small proportion of the total UK DC asset pool in any event.
“We welcome the potential for the recommendation of a pension provider to be a regulated activity, and for requirements on employers to review their pension provider periodically. Ensuring a robust and broad assessment of a pension provider’s qualities will help shift the emphasis away from charges onto value. To focus time and energy where the most value can be driven, and avoid a disproportionate burden on employers, a minimum size should be set above which these requirements should apply.
“Finally, while the qualities of the provider and investment performance are two of the key drivers of member outcomes, the biggest impact comes from the level of contributions that individuals make. The long-awaited pensions review, followed by the subsequent delay of the second phase, sends mixed signals to the industry. Whilst we appreciate the need to avoid additional costs on UK businesses at this time, that should be an implementation consideration of any proposed changes. The pension review and follow up recommendations are likely to be measured in years not months, and we would emphasise the need to start now to avoid storing up problems for the longer term.”
The Society of Pension Professionals (SPP) has responded to the HM Treasury/DWP consultation on unlocking growth in the UK pensions market.
The SPP has set out how investments made by UK pension funds already play a vital role in supporting economic growth and are a major source of long-term investment in the UK economy before going on to state, “…the industry broadly agrees it can still do more and is very much committed to doing so, as evidenced by the generally positive manner in which most of the industry has reacted to Government announcements on the need for an increased commitment to productive finance”.
However, the SPP caution that “ some of the current proposals are likely to have unintended consequences for scheme members, whose interests we believe should be at the heart of any pension policy reforms”
The SPP response further warns that, “…it is unclear if a minimum pension fund scale of £25bn AUM is needed or that scale alone will drive anysubstantial additional investment …in UK productive assets, let alone deliver better saver returns.”
The SPP suggest that to achieve the Government’s desired policy objective of better saver returns, “Government may wish to consider introducing industry league tables, constructed using a concise set of metrics that holistically assess member outcomes and are calculated by an independent trusted source. This would incentivise providers to aim for the size of AUM that would be most conducive to allocating investments with the most attractive net of fee risk-adjusted returns.”
With regard to exemptions, the SPP states that, “… if the Government decides to proceed with a minimum AUM requirement then it should consider a broad exemption for smaller funds that outperform their larger peers; an exempt growth period during which time any new arrangements can focus on building scale; and exemptions for schemes that serve niche markets such as Sharia compliant default arrangements and CDC schemes.”
If Government proceeds with all or any of the proposals in this consultation, the SPP stresses that, “…the sequencing in which these and other proposals are rolled out will make a very significant impact on overall costs and member experience. The SPP therefore urges policy teams to work through the optimal order of events to avoid duplication of cost and …to provide industry with a clear timetable of such sequencing.”
Sophia Singleton, SPP President, said;
“We support the Government’s overarching objectives to both invest more in the UK and boost saver returns. However, we aren’t convinced that these proposals are the best way to achieve this.
A minimum pension fund scale of £25bn AUM isn’t necessarily going to drive additional investment diversification or deliver better saver returns but could lead to unintended consequences of reducing competition, stifling innovation and potentially disadvantaging some minority groups.
As we have set out in our response, if the Government does decide to proceed with a minimum AUM requirement then it should be at a much lower level and Government should consider a broad exemption for smaller funds that outperform their larger peers; an exempt growth period during which time any new arrangements can focus on building scale; and exemptions for schemes that serve niche markets such as Sharia compliant default arrangements and CDC schemes.
We share the Government’s desire to make things better as soon as is practicable but getting these policy decisions right is paramount to achieving this.”
The SPP consultation response can be read in full here: