Pension fund consolidation brings benefits, but UK growth needs much broader strategy

The Pensions Investment Review is exploring how the pension system can support investment in homegrown businesses, particularly in private markets.

In its response to the call for evidence, the Pensions and Lifetime Savings Association (PLSA) said, properly structured, a system with fewer, larger pension schemes has the potential to deliver more diverse capital allocation across private and public markets, strong governance and oversight, the ability for schemes to negotiate more favourable costs and charges, greater investment expertise and better services for members, including improved communications and sophisticated procurement methods.

Based on PLSA member feedback, as assets under management reach £20bn, schemes can invest in a wider range of assets, including starting to co-invest in private markets; above this range schemes can invest directly and may increasingly use in-house investment teams. Above roughly £100bn the advantages of additional scale are incremental.

A more consolidated DC market will be positive for economic growth if more investment flows to UK investments. There is not, however, a direct causation between scale and inward UK investing. The UK’s recent period of political and policy uncertainty, which has affected things like government decisions on infrastructure projects and the UK’s approach to climate change, has sometimes made the case for investing in the UK less compelling. Rightly, pensions must ensure investments operate in the interest of scheme members and savers.

Consolidation already underway

Encouragingly for anyone who wants to see larger pension schemes invest more in UK growth assets, the structure of the market is already changing.

The defined contribution (DC) sector is consolidating rapidly, and is expected to continue in this trend unabated.

Today, most DC savers, and the vast majority of DC assets, are managed by around a dozen large insurers offering Group Personal Pensions and around 2o to 30 authorised Master Trusts. Three of the largest Master Trusts already manage over £25bn in assets each and a number of schemes have the operational aim to achieve scale of £100bn by 2030.

On its current trajectory DWP analysis shows the Master Trust segment of the market is expected to manage £1.5trn in AUM by 2035.

Increasing saver contributions under automatic enrolment, which is likely to be considered in the second stage of the Review, will have a much more significant impact on saver outcomes than higher returns resulting from consolidation. It would also help deliver scale in the DC market more quickly.

The benefits of consolidation can be delivered in a variety of ways.

The PLSA supports continued consolidation and argues the best approach to raising investment in productive assets is to make them more attractive rather than compelling investment in certain sectors.

The PLSA has made 12 recommendations for intervention which will lead to higher investment, and in a wider range of assets. These are:

For all schemes:

• The UK needs to establish a pipeline of investable assets. The PLSA has provided practical examples of sectors where pension funds could invest to increase UK growth; and what steps are needed by Government and the pension industry to achieve this. These measures are set out in Pensions & Growth: Creating a Pipeline of Investable UK Opportunities.

• The Government should provide fiscal and investment incentives: measures include providing an incentive, as is common in many other countries, for pension funds to invest in UK companies compared with non-UK.

• Achieving policy certainty: setting out a clear plan for the future of the UK economy, e.g. by setting out an industrial strategy for key tasks like the Green Transition. Addressing long-standing barriers to growth, including reforming the UK’s planning system is also needed.

For Defined Contribution schemes:

• Incentivising the market so that employers (and the EBCs and IFAs who advise them) select workplace pensions that focus on high performance for members rather than low costs. This involves government amending the employer duty related to default funds and introducing a value for money regime.

• Considering regulating the advice of investment consultants and ensuring advice from regulated IFAs addresses the impact of pension investment performance on scheme members.

• Consolidating investments as well as schemes e.g. using fund of fund investment vehicles.

• Raising automatic enrolment contributions from 8% of band earnings to 12% of salary, gradually, over the next decade, with most of the increase falling on employers, so that at the end of that period employers and employees each pay 6%.

For the Local Government Pension Scheme (LGPS):

• Implementing the LGPS Scheme Advisory Board’s Good Governance Review and ensuring the current fund and pool structures work well.

• Continuing with the transfer of assets from pension funds to the pools where this is in the interest of scheme members.

• Increasing the resources devoted to the operation of the LGPS.

For Defined Benefit schemes:

• More regulatory flexibility for open DB schemes given their greater ability to carry long term risks which is ideal for investing in infrastructure and private assets.

• Ensure the Solvency UK regime enables insurers to hold more illiquid assets so these can be accepted from pension funds as part of a buy-out transaction.

Nigel Peaple, Chief Policy Counsel at the PLSA, said: “UK pensions currently manage around £3 trillion of assets. One third – £1 trillion – is invested in the UK, with over half of this amount in the form of loans to government and the other half in a range of business assets – bonds, public equities, private debt and equity and property.

“The Government is considering whether and how consolidating UK pension funds can both increase investment in the UK and result in better returns for savers. We agree with the Government that larger pension funds are better able to undertake the complex and costly governance of managing private assets, which can have higher performance, albeit often at higher risk.

“We support the Government in taking measures to achieve greater scale in pension funds, where this is in the interest of scheme members, but scale alone will not result in higher investment in the UK. Our response, therefore, highlights a range of policy, regulatory and fiscal interventions aimed at attracting additional pension fund investment into UK assets. These include: a stable policy context, a coherent industrial strategy, reform of barriers to UK investment, such as planning reform, and fiscal incentives for investment in the UK as compared to other countries.”

Download the PLSA’s response to the call for evidence.

Mark Smith, Head of Media Relations
020 7601 1726 | [email protected]

Cali Sullivan, PR Manager

020 7601 1761 | [email protected]