The industry is reacting to the UK’s HM Treasury/DWP consultation on unlocking growth in the UK pensions market which closes on 16 January.
The Society of Pension Professionals (SPP) 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 any substantial 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.”
Kate Smith, head of pensions at Aegon, said: “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.”
