There’s no getting away from it, charges are going to go up across the board in the DC pensions market. The current dual or multiple default strategy is only going to last so long. Eventually, all multi-employer defaults are going to contain more expensive private market assets, so charges will go up.
Single-employer trusts are not included in the mandation reserve power, so could this create another reason not to consolidate?
For providers, running a dual default strategy is a way to maintain market share by putting off adopting Mansion House commitments for as long as possible. Some advisers tell me that they see the current dual or multiple default approach as ultimately bringing in clients on the cheap option, for them to be moved to a more expensive option later, a model not that dissimilar to that used by my broadband supplier.
The honest thing to say to employer sponsors of DC pension schemes is that charges are going to go up. The current dual or multiple default model being adopted by some providers can only be a stepping stone towards higher charges in future.
Pension Minister Torsten Bell’s call for the industry to ‘chillax’ over the mandation threat is designed to turn the pressure back on providers to deliver on their Mansion House Accord commitments.
The government’s objective is to get more DC funds investing in UK early stage businesses, and to stop providers from backsliding on their promises. The predecessor of the Mansion House Accord, the Mansion House Compact, was not being implemented at pace. Our research of multi-employer DC providers found that, 18 months after the Mansion House Compact, half of providers’ biggest defaults had no private market allocations whatsoever.
Since then many providers have launched private market defaults to run alongside cheaper options, understandably so. But ultimately all defaults, especially providers’ biggest ones, will be required to hold a 10 per cent allocation to private market assets.
It is true that the Pension Schemes Bill only creates a reserve power, but Bell has made it quite clear that it will be used if the Mansion House targets aren’t met.
While there is a lot of positivity around private markets, there are also some voices in the industry who have concerns as to whether these assets bring better risk adjusted returns after charges.
As one lawyer said to me recently, the only way to guarantee an increase in your returns is to lower your charges. This may sound like an old school approach to this controversial area. But it does raise the question of whether we will see greater sign posting, by schemes towards cheaper investment options that don’t include private markets.
One other concern with the Pension Schemes Bill is that the range of ‘qualifying assets’ it requires schemes to invest in under the reserve power is not limited. The bill says says prescribed assets ‘may for example be: private equity, private debt, venture capital or interests in land’. But it does not limit the scope of what can be added to this list. What is to stop a future government from putting gilts on it, should they need to?
