The UK government has confirmed plans for so-called defined contribution (DC) mega funds in the long-awaited Pensions Scheme Bill, which is set to shake up the investment industry.
Liz Kendall, Work and Pensions Secretary, says the proposed legislation will “transform the GBP2 trillion pensions landscape to ensure savers get good returns for each pound they save, and drive investment into the economy”.
New rules will see the creation multi-employer DC scheme “mega funds” of at least GBP25 billion, which government claims will drive down costs and be “better placed to invest in more productive assets, including infrastructure and fast-growing companies”.
Further the Local Government Pension Scheme (LGPS), will be consolidated into six pools that can invest in local areas infrastructure, housing and clean energy.
The Bill also includes a reserve power which would, if necessary, enable the government to set quantitative baseline targets for pension schemes to invest in a broader range of private assets, including in the UK.
Damon Hopkins, Head of DC Workplace Savings at leading independent financial services consultancy Broadstone,says: “The Bill confirms the government’s stated direction of travel of inserting a backstop law to firmly twist – if not mandate – the pension industry’s arm towards what it perceives as sufficient allocations to UK assets and infrastructure.”
Hopkins says the possibility of mandation creates a potential conflict between a pension scheme’s fiduciary responsibility to maximise savers’ retirement outcomes and the advantages to the UK economy.
“While billions of pounds of investment into the UK economy will have obvious advantages, UK pension savers are inherently exposed to risks in the UK economy in their day-day lives so increasing this risk may not be optimal, nor is it guaranteed that the returns yielded will be better than those on offer globally.”
Words of caution also come from Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, who reminds government of the importance of ensuring a competitive environment” in a world of DC mega funds.
“While scale is important in delivering better outcomes for savers, it must not come at the cost of reducing competition, member choice and much needed innovation. This has the ability to drive-up member engagement with their pensions, improve decision making and boost outcomes.”
She added “With the changes planned from the advice guidance boundary review and pensions dashboards coming on stream, there’s also a big opportunity to transform how we all engage with our pensions. The push for scale shouldn’t stifle the innovation that can flow from these regulatory changes.”
The Bill also paves the way for defined benefit (DB) scheme sponsors to release surplus – worth a collective GBP160 billion – to support investment plans and members.
Jos Vermeulen, Head of Solution Design at Insight Investment, calls the proposals a game-changer not just for sponsors and the economy, but also for the gilt market.
“For the UK, the boost for corporates and members should be a clear positive for jobs and growth. It also means DB schemes are more likely to run on for the long term, avoiding gilt sales approaching half a trillion pounds or more due to buy-outs. The government can also expect to realise up to GBP40 billion in tax revenues.”
