Retirement saving policy has been significantly elevated on the political agenda again, following the Chancellor’s Mansion House speech in July. Testament to that was the launch of 10 separate pensions papers from the Department for Work & Pensions, including five new consultations, representing a very ambitious programme of reforms.
Retirement saving has now been firmly linked with the challenge of improving economic growth, with the idea that pension assets could be invested in areas of the economy seeking capital. While the ‘compact’ agreement — a voluntary commitment to invest 5 per cent of pension default funds in unlisted equities by 2030 — was centre stage, it became clear that ‘productive investment’ was a theme that would run through most of the other consultations.
In most cases, the connection has been made between increasing scale through consolidation and the ability to invest a proportion of larger pension funds in illiquid assets. There is some obvious logic to this, although with varying degrees of difficulty when considering the unique circumstances of each type of pension scheme.
For example, it is easier to envisage an open, funded public sector defined benefit (DB) scheme having scope to withstand greater risk in pursuit of higher returns, but the motivation is less obvious for a closed, mature private sector scheme, where the trustees and sponsor may be far more focused on the certainty of matching their liabilities in the short term, rather than taking on more risk. Decades of successive regulation has dictated this shift away from risk assets so there will probably be limited appetite among trustees of schemes nearing buyout funding levels to change direction at this stage.
Proposals for DB superfunds, and the reorientation of the Pension Protection Fund as a more active consolidator will likely generate a lot of interest and debate among trustees. There are pros and cons to these ideas. It’s clear that they could lead to greater scale, but the complexity of bringing together the unique
rules of each individual DB scheme shouldn’t
be overlooked.
In defined contribution (DC) schemes, the challenge is more to do with liquidity and cost, but there is scope for younger members to benefit from taking on greater risk over the long term, provided this is carefully managed.
There is clearly a will to introduce collective DC (CDC) schemes as a halfway house between DB and DC, but we have yet to see the market develop beyond the Royal Mail example at this stage. It seems likely this will be demand driven, rather than a ‘build it and they will come’ approach. If it does develop, there may be greater scope for illiquid investment in the accumulation phase as the assets are less likely to be transferred or withdrawn if they are tied to a more certain pension income at retirement.
The consultation on small pots is arguably the most far-reaching of the consultations in terms of the changes to the retirement saving market. The introduction of consolidators may lead to greater scale (and therefore the potential to invest in illiquid assets) in time. But it’s less clear how beneficial this will be for savers, and a more intuitive model seems to be ‘pot follows member’ where consolidation takes place in the saver’s most up-to-date workplace pension, as opposed to a third party with whom they have no obvious connection.
All in all, this is a very progressive set of reforms, and will lead to healthy debate on issues that certainly need to be resolved. Certainly, some of them will pave the way for more productive investment, but should only do so where it is clear it is in the best interests of people saving for their retirement.