SPP is leading the criticism of the pension investment review objectives, with the industry responding to Government proposals aimed at boosting UK investments through pension fund consolidation.
Many raise concerns over the £25bn minimum fund size, warning it could stifle competition and disadvantage smaller or niche funds arguing that it “isn’t necessarily going to drive additional investment diversification or deliver better saver returns.”
They suggest focusing on the types of investments made and offering exemptions for smaller, high-performing funds because “setting hard targets is not the best approach.” Concerns about “substantial and costly upheaval” have led to calls for phased implementation to avoid unintended consequences.
SPP president Sophia Singleton says: “The industry broadly agrees it can still do more and is very much committed to doing so, as evidenced by the generally positive manner in which most of the industry has reacted to Government announcements on the need for an increased commitment to productive finance.
“Some of the current proposals are likely to have unintended consequences for scheme members, whose interests we believe should be at the heart of any pension policy reforms
“It is unclear if a minimum pension fund scale of £25bn AUM is needed or that scale alone will drive any substantial additional investment …in UK productive assets, let alone deliver better saver returns.
“Government may wish to consider introducing industry league tables, constructed using a concise set of metrics that holistically assess member outcomes and are calculated by an independent trusted source. This would incentivise providers to aim for the size of AUM that would be most conducive to allocating investments with the most attractive net of fee risk-adjusted returns.
“If the Government decides to proceed with a minimum AUM requirement then it should consider a broad exemption for smaller funds that outperform their larger peers; an exempt growth period during which time any new arrangements can focus on building scale; and exemptions for schemes that serve niche markets such as Sharia compliant default arrangements and CDC schemes.
“The sequencing in which these and other proposals are rolled out will make a very significant impact on overall costs and member experience. The SPP therefore urges policy teams to work through the optimal order of events to avoid duplication of cost and …to provide industry with a clear timetable of such sequencing.
“We support the Government’s overarching objectives to both invest more in the UK and boost saver returns. However, we aren’t convinced that these proposals are the best way to achieve this.
“A minimum pension fund scale of £25bn AUM isn’t necessarily going to drive additional investment diversification or deliver better saver returns but could lead to unintended consequences of reducing competition, stifling innovation and potentially disadvantaging some minority groups.
“As we have set out in our response, if the Government does decide to proceed with a minimum AUM requirement then it should be at a much lower level and Government should consider a broad exemption for smaller funds that outperform their larger peers; an exempt growth period during which time any new arrangements can focus on building scale; and exemptions for schemes that serve niche markets such as Sharia-compliant default arrangements and CDC schemes.
“We share the Government’s desire to make things better as soon as is practicable but getting these policy decisions right is paramount to achieving this.”
Royal London policy director Jamie Jenkins says: “Royal London is supportive of the Government’s agenda for pension investments to contribute further to economic growth, but we do not believe that setting hard targets is the best approach for the Government to achieve its objectives.
“While greater scale will enable greater investment in private and illiquid assets, we don’t believe that scale alone would encourage or incentivise such a move. Equally, there is nothing inherent within scaling up investments that would create a greater home bias for listed equity investment.
“A more direct route for Government to achieve its aim would be to focus instead on the investment mix deployed by schemes, which we believe will naturally lead to greater scale. This could be achieved through careful design of the Value for Money (VfM) framework, currently being consulted upon by regulators. That could be shaped in a way that places emphasis on access to illiquid, longer-term assets – such as critical infrastructure – and this will almost certainly drive a higher UK investment bias. However, to achieve a material shift in thinking, the framework would need to look beyond short-term returns and consider the longer-term benefits.
“This is a perfect opportunity to refocus the timeframe over which we consider the value of investing for retirement which is, after all, several decades in duration.”
Sackers partner Jacqui Reid says: “We welcome the Government seeking views from the industry on its proposed reforms to accelerate consolidation in the DC market. We know that the Government’s primary objective is to generate further investment in the UK and that this is in reality the key driver behind these proposals. We are supportive of the creation of “mega funds” in principle, provided that the interests of members remain central to their creation and that there are no barriers which prevent much needed innovation in the DC pensions industry.
“We believe greater clarity is needed from the Ministers on exactly what the Government wants from the pensions industry to achieve its aims – defining exactly what is meant by “UK productive finance”, “fund” “scheme” and “default” is critical as we think they can be interpreted in many different ways. We also encourage the Government to listen to the views of the industry on the extent of scale needed to invest in UK private infrastructure as there are a range of opinions on how big mega funds need to be in practice to achieve the Government’s objective and on the extent to which such assets will be readily available.
“In our view, large-scale consolidation whether that be at “fund” or “scheme”, “trust” or “contract” level would create substantial and costly upheaval over a number of years. Any large-scale change needs to be mindful of trustee fiduciary duties to members, providers’ obligations in respect of consumer duty and IGCs’ role of ensuring value from the perspective of the member.
“We believe the proposed pace for consolidation is optimistic and the Government should instead consider phasing its proposals over a longer period. If consolidation happens too quickly, and without a publicly shared roadmap for doing so, the result could cut across other Government objectives at a time when savings adequacy is under threat.”
The Investment Association director of policy, strategy and innovation Jonathan Lipkin says: “Through successful reform of our pensions system, we can improve investment outcomes for millions of pension scheme members and better channel productive capital into business and infrastructure, helping to boost economic growth. These consultations are an important stepping stone to achieve this.
“Building further scale into the workplace DC pensions market is important, but it is not a panacea. The UK pensions system will only be world class if it operates with sophisticated scale. This requires a focus first and foremost on strong investment governance, oversight and accountability, which will in turn facilitate diverse capital allocation across private and public markets. By simultaneously emphasising these factors within a highly competitive procurement environment, we can also shift the delivery culture in the DC market towards value rather than low cost.
“As the UK’s largest funded public sector pension scheme, the LGPS plays a critical role in providing economic risk capital and sustainable, affordable pensions to its 6.4 million members. We support the overall rationale for LGPS consolidation and have supported its implementation since 2015. As with DC pensions, greater scale must be sophisticated, underpinned by an emphasis on strong governance, accountability and appropriate investment expertise to best deliver value.
“If managed correctly, the further consolidation of both DC and LGPS pension funds is a positive step towards a better-functioning market that invests in a wide range of assets and delivers strong returns. We look forward to continuing to work closely with government, industry and regulators to create a pensions system that works for all.”
Smart Pension CEO Jamie Fiveash says: “We welcome the consultation in bringing forward discussion on several issues and supporting the development of a future vision for the industry. There are several important and welcome proposals in the consultation. We welcome the proposals to make it easier for legacy contract-based schemes to consolidate. The market is very fragmented, especially pre-auto enrolment and there is a long tail of legacy arrangements with suboptimal charge structures and investments where it would benefit the customer to move to something more modern with the appropriate governance structures in place. Smart also agrees that the UK DC market has been overly focused on low charges and this has led to it being overweight in passive tracking equities. We are supportive of measures to change the focus and use alternative forms of investment, such as private markets.
“However, whilst we recognise the importance of scale, both for delivering value in investment and administration, we see huge risk and complexity with creating scale tests alone as means of being permitted to operate in the market. We also think there is limited evidence to support that £25bn is the correct value for such a test or understand the logic to why it is applied only to DC schemes operating auto enrolment only. The schemes operating auto enrolment are more modern schemes which tend to have more innovative investment strategies and lower charges, compared to legacy GPPs which are not increasing in value at the same pace.
“Applying a scale test alone to assess whether a provider can continue to operate in a market would be unprecedented across modern global pension markets and in other related industries. For all the detailed reasons in our consultation response and those of the main industry bodies, PLSA and ABI, we believe there are also many damaging unintended consequences of such an approach. Additionally, it would be challenging to implement and require a very complex set of regulations – requiring many exemptions. In addition, applying at default fund level adds a further level of complexity and misses how in practice scale is achieved for providers to deliver improved value for members, across both investment and administration.
“More importantly, enabling new entrants and competition is vital to ensuring consolidation (at all levels), innovation and value are delivered. The proposals highlight this but are silent on how they would design rules that ensure competition continues to exist. There is a long tail of small schemes in the UK that need to be consolidated and those providers currently not at £25bn will be the ones who will undertake this consolidation. Consolidation is expensive and risky, why would a provider who is at £25bn want to undertake consolidation of a scheme lower than 1 billion or even 5 billion? All the Master Trust consolidation done to date, in reducing from c70 to below 30 has been done by smaller and mid-size providers.
“The UK DC pension market continues to consolidate at a greater pace than Australia and has many strengths over this and other markets. We think the focus should therefore be to build on these strengths and take the best learnings from other countries but without direct interference that threatens the current market dynamics. New policy initiatives such as VFM are likely to speed up consolidation further and we are already beginning to see a shift to greater use of private markets, just from the positive debate that is being created by the Government and DWP and some subtle changes to make investment into private markets easier.
“A standardised net returns measure should be brought forward from the VFM framework and implemented as soon as possible. This will move the focus from low charges to investment returns.
“Scale tests should be incorporated as part of the VFM framework. This will ensure that the focus is on value for members above all else and is applied to all schemes – non-AE schemes and Single Employer Trusts. The VFM framework already suggests £10bn as the size of scheme that other schemes should compare investment performance to – this could be reviewed and increased. The VFM framework could also have disclosures and tests from private markets holdings. This will also ensure scale and private markets are a consideration of value much earlier than 2030.
“Creating greater investment into the UK specifically is more complex and there are macro-economic issues to solve. The quickest way to create greater investment into the UK would be fiscal incentives. However, outside of this, disclosures or a ‘comply or explain’ regime feel much more acceptable than forcing schemes to invest in the UK, which would threaten the Trustees’/IGC’s fiduciary duty.
“Finally we consider that there is a significant sequencing risk of some of the proposals in here versus other policy initiatives within the pensions regulatory landscape, including VFM, small pot consolidation, decumulation and the launch of the Pensions Dashboard. Providers need greater certainty to plan their futures and we encourage the Government to produce a roadmap to set out how their initiatives work together and when they come into effect.”