Think tank fever for pensions

There is a lot of innovative thinking happening at the think tank level and in HM Treasury aimed at the pensions industry and in particular making best economic use of the invested assets.

There are literally trillions of pounds saved in UK pension schemes (defined benefit (DB) and defined contribution (DC) and the government has made it clear it would like to use that money. The last few budgets have included this desire and we’ve had recent regulations which allow DC schemes to invest in illiquid assets without falling foul of the charge cap rules as well as asking Trustees of DC schemes to document their view towards illiquid assets and why they do or do not form part of their portfolio.  However, the rhetoric has been rising over the past few days, culminating in what has been a manic weekend for idea floating.

It began with the government floating the idea that they would allow the Pension Protection Fund (PPF) to become a master consolidator and then free up the assets to be invested in the “UK’s high growth sectors, ensuring our most cutting-edge businesses can access the finance they need to scale up and list in the UK.”  The PPF noted that its role is one determined by the policy makers and it “stands ready” to support government and industry.

There is also the concurrent idea of instructing schemes to place 5% of their assets into a £50bn growth fund. This idea also has support of the Labour Party so is building a worrying consensus.

Hot on the heels of this is the idea mooted by the Tony Blair Institute that the solution to the problems of ALL pension schemes (although their usage of terminology is not consistent) is to amalgamate them into initially one but then a number of PPF style super-superfunds.

With a lot of this big thinking one fact has been, perhaps deliberately, missed.  It is not the job of Trustees to fix the country.  We may all have a social contract towards societal goals, but this must be balanced with the Trustees’ fiduciary duty towards their beneficiaries.  Ultimately those who stand to lose out in most of these mandated ‘solutions’ are members (unless there is to be yet further pressure/cost passed on to those sponsors still on the hook for a DB funding deficit).

DB Trustees are investing in ways to ensure that the benefits promised are paid in full. This means not investing to make as much money as you can but holding as much as you need.  They are regularly and repeatedly told by the Regulator to manage and reduce risk, and the government’s new funding regulations would push even further in this direction.

DC Trustees have the task of ensuring they are putting responsible options in front of their members and are providing default solutions where funds will grow in a way that isn’t overly risky and will provide retirement income for their members in the future.

Mandating asset allocations is likely not the way to go and should be resisted. We’re pleased to see many in the industry supporting this point. If an asset can be demonstrated to provide attractive risk adjusted returns for a cohort of investors (potentially including pension schemes) then people will invest. Make them good value and accessible to pension schemes of all sizes and they will invest.  But compulsion does not allow responsible and sensible investment decisions.  And if you have a market where some players are forced to hold assets whilst others come and go more freely then, those with the freedom will exploit those who are tied in, potentially cashing in on the gains and selling to avoid undue losses.  This cannot be good news for our country’s pension savings.

In any event, the government already has the method to raise money for spending and this is the issuance of gilts. If these investment opportunities are so good and likely to attract large returns, then they could simply issue the gilts and invest it themselves. There are plenty of DB schemes that will snaffle up the gilts. 

The mooted ideas also run contrary to the government’s own new regulations on DB funding which, as drafted, have inherent inflexibility and push for pension scheme assets to be invested more securely and at an earlier stage than would be expected under the existing rules.

The politicians’ proposals are therefore arguably sounding disconnected – with all parties seemingly wanting to champion ultimate security for pensioners (or at least being terrified of any headlines to the contrary) as well as using the same funds to ‘promote economic growth’ – or perhaps they are just hoping no one will notice the inherent contradictions. 

The other misnomer running through many of the discussions is that small schemes are bad (whether this is inefficient, poorly governed, or not making the ‘right’ investment choices).  This is simply not true.  We know from our own industry experience that a huge number of small schemes have the support of their sponsor, the Trustees take their responsibilities seriously and are actively managing their risks with good quality advisers who can give them bespoke advice that is suitable to their circumstances.

For consolidated efficiency, or if fast tracking into the PPF, then it would seem that benefit changes (by which we probably mean reductions or at the very least ‘design compromises’) would be a fundamental part of any solution – inevitably leading to some members being worse off.  And on the investment front, start with the larger schemes first if these are attractive propositions.  It is common in the market that the successful and desirable large scheme solutions are eventually rolled out to ‘smaller’ investors so the full investment would come, over time.

Fundamentally, while it’s great to see people thinking about the future of our pension schemes, there is some vested interest or questionable motives still seems a lot of self-interest and headline grabbing involved in the latest round of ideas.  Looking at these funds purely as ‘investible assets’, without consideration of their underlying purpose misses some fundamental contradictions in terms of the bigger picture of policy making.  Ultimately, it is not clear how corralling small schemes into one large morass will improve member outcomes and make the payment of their currently promised benefits more likely (even for the large majority).  And it is far from clear how Trustees could be expected to balance prudent and responsible management of their assets with one hand tied behind their back due to compulsion.

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