Mandating a specific consolidation threshold, such as £25bn, may stifle innovation in the defined contribution (DC) space says Hyman Robertson head of DC markets Paul Waters.
In response to the government consultation titled Unlocking the UK Pensions market for growth, providers and consultants have urged the government to focus on value-for-money metrics, rather than asset size when driving consolidation in the DC market. Responses to the consultation highlight concerns that requiring a minimum asset size of workplace pension providers could impact innovation and may not necessarily improve member outcomes.
Waters supports creating larger pension arrangements with the scale to access better investment opportunities but notes that while scale is necessary for private market investments, it doesn’t guarantee investment in UK productive assets.
He highlights megafunds as key facilitators for growing private market investment in the UK, but smaller arrangements also deliver good value for members and shouldn’t be eliminated.
Waters supports employer pension reviews as well as regulating pension providers, focusing on value above charges. He suggests applying these requirements only to providers above a certain size to avoid burdening employers.
Waters also highlights the importance of individual contributions for member outcomes and calls for action on the pensions review to address long-term challenges while considering business costs during implementation.
Waters says: “As a firm, we are broadly supportive of the drive to create larger pension arrangements with the scale to better access investment opportunities like private markets. This can deliver better member outcomes as outlined in the consultation. We do, however, believe that it is important that any requirement to consolidate does not stifle innovation in the DC marketplace and therefore are not supportive of mandating a threshold such as £25bn.
“The DC market is moving forward quickly, and recent history has shown smaller, more nimble organisations can innovate and deliver positive change. It will be important not to lose this innovation. At the same time, we understand the government’s aim to achieve scale, and in tandem, to drive investment into UK productive assets. Scale (at some level) is required to invest in private assets but it does not in itself compel investment into these areas – it is a necessary but not sufficient condition for investment in UK productive assets. Megafunds are an important part of this solution and have a key role to play in helping to grow the UK private market investment.
“The consolidation journey that the pensions industry is on already, together with the ideas proposed in the consultation, will result in a number of very large arrangements with many of the attributes required to deliver the investment desired. We do not think it will be necessary or desirable to eliminate smaller arrangements (£5bn plus), who are large enough to do private market investments in some form, deliver good value for members and will only make up a small proportion of the total UK DC asset pool in any event.
“We welcome the potential for the recommendation of a pension provider to be a regulated activity, and for requirements on employers to review their pension provider periodically. Ensuring a robust and broad assessment of a pension provider’s qualities will help shift the emphasis away from charges onto value. To focus time and energy where the most value can be driven, and avoid a disproportionate burden on employers, a minimum size should be set above which these requirements should apply.
“Finally, while the qualities of the provider and investment performance are two of the key drivers of member outcomes, the biggest impact comes from the level of contributions that individuals make. The long-awaited pensions review, followed by the subsequent delay of the second phase, sends mixed signals to the industry. Whilst we appreciate the need to avoid additional costs on UK businesses at this time, that should be an implementation consideration of any proposed changes. The pension review and follow-up recommendations are likely to be measured in years not months, and we would emphasise the need to start now to avoid storing up problems for the longer term.”
