The Pensions and Lifetime Savings Association (PLSA) has published policy recommendations to encourage further investment by suitable pension schemes in assets that can help drive growth in the UK economy.
The report offers targeted policy recommendations to the government in six areas, including asset pipeline, DB regulation, taxation, consolidation, the DC market under automatic enrollment, and increasing pension contributions. It builds on the PLSA’s June 2023 report titled “Pensions & Growth: A Paper by the PLSA on Supporting Pension Investment in UK Growth.”
The PLSA suggests giving the British Business Bank the authority to find pension funds affordable UK productive financial assets such unlisted stocks, debt, and infrastructure and encourage the creation of Growth Funds and other comparable investment vehicles, such as the LTAF, in the asset management sector. It says that to encourage pension fund investments in UK growth, the government must ensure strategic, long-term support for important businesses and the Green Transition to achieve Net Zero by 2050.
For DB pension plans, PLSA suggests changing funding rules to provide investing flexibility, modify the TPR DB Funding Code and DWP regulations specifically to allow open and long-term closed DB pension funds to take on higher investment risk when protecting member benefits. It also proposes increased employer support, changes in discount rates, and freedom from being forced to cut back on investment risk, such as aiming for the “low dependency” funding level, should all fall under the umbrella of this flexibility.
The report recommends adding fiscal incentives to make investing in UK growth more appealing than doing so in competitive assets. PLSA calls on the Chancellor to allow tax-free profits for pension fund investments in UK businesses and provide extra tax breaks for UK startups and businesses looking for late-stage growth funding, akin to the LIFTS project.
According to PLSA, the government should prioritise passing laws to ensure the safe expansion of DB Superfunds, supporting asset consolidation in DB Master Trusts, and pushing asset consolidation for the LGPS (England and Wales) only when it ensures appropriate investment products. The government should also keep up its initiatives to promote DC scheme consolidation, including Value for Money tests.
The report also recommends changing the automatic enrollment market’s DC pension fund selection procedure to put more focus on performance rather than cost. Currently, mandates might be lost owing to negligible variations in annual costs, sometimes brought on by simpler, less complicated investing plans. We argue for corporate IFAs and Investment Consultants to prioritise net performance over cost when advising employers on pension schemes, aligning with the long-term interests of savers, in addition to the government’s continuous Value for Money test.
Finally, PLSA recommends that the UK gradually increase pension payments within automatic enrollment, moving from the current 8 per cent of a band of incomes to 12 per cent of all earnings, commencing in the mid-2020s and completing in the early 2030s, in order to strengthen pension assets. We propose equalising these contributions, which are now 3 per cent from employers and 5 per cent from employees. This strategy will provide a sizable, long-lasting pool of investment assets.
PLSA director policy & advocacy Nigel Peaple says: “Since early 2023 there has been considerable discussion by politicians, think tanks and the media on whether and how pension funds can be encouraged to invest more in the UK economy, especially regarding companies with the potential for very high growth, albeit usually also at high risk.
“While it is imperative that pension schemes’ freedom to invest in the best interests of their members, however they see fit, is protected, the PLSA has worked hard to identify specific policy reforms that could result in further investment in the UK, following the Mansion House reforms in July.
“We have identified six policy, regulatory and fiscal changes that could bring benefits to both pension scheme members and the UK economy, without the need for radical, highly disruptive changes to the operation of the UK retirement savings system.”
