Rachel Reeves’ Mansion House Speech, and the interim report of the Pensions Investment Review, talk about the proposed consolidation reforms taking effect from ‘2030 at the earliest’. But their impact is being felt immediately.
The Government wants to consolidate the current 60 multi-employer schemes into around 15 ‘megafunds’ – and the Chancellor has signalled a desire to bring in a minimum provider/scheme size of £25bn, on the basis that schemes of this size are more likely to invest in productive assets such as private equity and infrastructure.
The argument that private market assets can deliver higher returns over the long term feels like it has been won. Scepticism over private market returns in the DC community has virtually evaporated over the last 12 months, a quite remarkable turnaround for a sector eyed with suspicion just a few years ago.
There is even support amongst the industry for adapting fiduciary duty to include materiality beyond investment returns. Climate activists have pushed for this to relate to environmental factors, and a recent poll by Corporate Adviser suggests DC professionals are comfortable with that materiality extending to workers’ rights and even the nation’s infrastructure and economy. We are getting increasingly comfortable with backing Britain, provided the returns stacks up, which is precisely what Reeves, and her predecessor Jeremy Hunt, had hoped.
Much of these changes are many years away. But for smaller providers looking to grow their business, the impact of the Chancellor’s speech will be felt straight away. Persuading new clients that they will be here for the long term has just got a whole lot harder. For small innovators in particular, this will be a difficult time.
For mid-range providers, a lot will depend on what ‘£25bn’ actually means. Will the £25bn minimum provider size come down in the consultation? Will a roadmap towards £25bn (or some other figure) be what is required, and if so by when? And what about innovators and special groups such as those with religious objections to the big pooled funds the Government wants to see money invested in?
And then beyond these factors, there is the question of what is being measured – provider/scheme value or fund value? It is an issue acknowledged by the consultation into the implementation of a minimum size rule.
Creating a hard and fast rule here will be difficult, and it is hard to see which investments will count and which won’t. If a small provider, with no chance of ever achieving £25bn of assets, invests in the British Growth Partnership, the national wealth fund investing in UK patient capital, is that doing more to support the Treasury’s objectives than a bigger provider that does not?
The upshot for big providers will be a focus on shrinking the numbers of defaults they offer. The proposed bulk transfer without consent rules will be a big help here. These will also facilitate moves to more expensive defaults, for good or bad.
For mid-sized providers it will be a case of consolidating by acquisition or merger, or of building a case for how to get scale in a suitable timescale. Interesting times.
