There are “major risks” in encouraging schemes to invest in UK productive assets, and the new value for money regulation could create a “herd mentality” among schemes and hamper investment innovation.
These concerns were expressed in the feedback to the Government’s call for evidence on the Pension Investment Review, which closes today.
Most pension providers and organisation were broadly supportive of those aims the review in encouraging consolidation and diversifying investments to boost member outcomes. However the Society of Pension Profession said that while scale can help deliver improved investment returns, there are risks which must be guarded against. The PMI (Pensions Management Institute) added that significant consolidation in the DC space could create large schemes that might be deemed “too big too fail”, and this could potentially hamper innovation in this sector.
Meanwhile, Aegon said that it was concerned about the government mandating schemes to invest in UK productive assets. Aegon pension director Steven Cameron says: “The consultation asks which is more likely to invest more in UK productive assets. Here, the key driver will be having the investment scale to diversify into such classes and the expertise (in-house or through third parties) to do so in a well governed manner. But regardless of scale, decision-makers must be left to assess whether such investments will deliver benefits over alternatives.
“It would be highly risky to legislate for particular investment allocations. Trustees and Independent Governance Committees will be very much against being forced to invest their schemes assets in a particular way if they believe this is not in the member’s best interests.
“The Government could set an overriding requirement that a minimum percentage of assets had to be invested in UK productive assets. But this has the potential to backfire on the Government, if it is viewed as people’s pensions propping up the UK economy, or in future if such asset classes underperform.”
Cameron also express concern about the Value for Money framework currently being consulted on, saying the strong focus on comparisons with peers, could ironically create a herd mentality and discourage governing bodies to take ‘outlier’ positions with such investments.
This could also potential counter moves to get schemes to invest in potential higher risk but higher return sectors such as UK infrastructure and private equity.
Whilst acknowledging the benefits of consolidation The PMI also expressed concerns about possible adverse consequences of significantly reducing the number of registered DC arrangements.
PMI’s director of policy and external affairs, Tim Middleton says: “Whilst consolidation will bring benefits such as economies of scale and improved governance standards, there are also a number of risks to consider. Large schemers might become ‘too big to fail.’ A small number of large schemes might also lead to a stifling of innovation. There is also the possibility of anti-competitive practices and that it might become too difficult for new entrants to the system from becoming established. If the overarching goal is to improve quality for members, consolidation has the potential to create as many problems as benefits.”
SPP President Sophia Singleton, adds: “The SPP response has sought to be constructive in not only highlighting some potential pitfalls and areas that will require attention, but potential solutions.
“The input of our experienced pool of members, spanning the various parts of the pensions industry, means we can provide a well-balanced and thoughtfully considered response to what are major priorities for the current government and may represent substantial challenges and opportunities for industry.”
