First 100 days of government: helping bridge the pensions and growth gap

Strong growth is the foundation of a thriving economy and society and there are a variety of policy measures that governments can adopt to secure higher growth.

While fiscal and monetary policies are the preeminent mechanisms for driving economic growth, an emergent theme over the past 12 months has been around how pension funds could help drive growth in the UK.

Pension schemes already invest around £1trn in UK-listed assets – gilts, corporate bonds, equities, and alternative assets - and have a higher domestic equity exposure than the overseas pensions giants Canada and Japan, despite this, a debate about a perceived under-investment by the £2.5 trillion UK pension sector in British growth companies has been ongoing.

Pension funds exist solely to provide retirement incomes to their members. We believe though there are policy interventions available which could mean investing in growth meets the right risk/return profile needed for pension schemes. It is also important that discussions around incentivising growth takes account of the different profiles of UK pension schemes with Open / Closed DB, the LGPS and DC schemes having very different investment horizons and short-term liabilities.

For DB schemes, effective regulation is one way of achieving this. The funding regulations that apply to DB pension funds should be amended to provide greater flexibility over their investments. In particular, DWP regulations, and the related, forthcoming, TPR DB Funding Code should allow open DB pension funds, and closed DB pension funds with long investment time horizons, to take more investment risk where this is appropriate. An appropriately flexible regulatory regime that actively provides greater optionality over funding and investments would better support growth.

For DC schemes, better member outcomes could be achieved by increasing contributions so that not only do savers benefit from improved retirement incomes, but pension funds could, owing to greater pools of investable capital, invest more in high growth assets. In our view, the UK must increase the flow of assets into pensions by gradually increasing the level of pension contributions under automatic enrolment from today’s 8% of a band of earnings to 12% of all earnings. Today, employers are only required to pay 3% while employees pay 5%; we believe this minimum should be equalised so that each pays 6%. Raising automatic enrolment contributions in this way would both support helping members to save and provide a deep and lasting pool of investment assets for decades to come.

For all types of schemes, consolidation, if it is done well, has the potential to achieve economies of scale that can unlock new investment opportunities, give schemes greater influence in ESG and RI matters, and deliver better value-for-money – all of which should support better outcomes for members.

We are therefore calling on the government to encourage investment in the UK economy in the following ways:

• Automatic enrolment DC Market: Support the ongoing Value for Money regime so there is less focus in DC schemes on cost and more on performance. Importantly making sure that the regimes run by the FCA and TPR truly align and that the retail market is captured.
• Pipeline of assets: Work in close partnership with the pension industry to identify a pipeline of investible opportunities which will both support UK growth and achieve the right risk-return and cost characteristics needed. There has already been good work across the political spectrum about how this might be achieved.
• Fiscal incentives: Use the first Budget to introduce fiscal incentives that make investing in UK growth more attractive than competing assets, this could be to allow tax free dividends on investment by pension funds in UK companies, and provide additional tax incentives, like the LIFTS initiative, in UK start-ups and companies requiring late-stage growth capital.

Click here to read what other action the PLSA is calling on the next Government to enact in its first 100 days to help everyone achieve a better income in retirement.

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