Consolidation of DC schemes towards larger plans could stifle innovation and create an environment with little variation, according to former pensions minister Steve Webb.
Webb, who is now a partner at consultancy firm Lane Clark & Peacock, pointed to the difficulties of a smaller manager persuading pension plans to join when it uses strategies markedly different from the larger players.
“With consolidation we’re moving into a world with limited competition and virtually no entry. So where does where does the innovation come from?,” says Webb in conversation with Corporate Adviser.
“If you’re up against a £100bn household name pension scheme and you want to persuade employers to choose your £2bn pound scheme that does things a bit differently, it’s going to be very difficult. I think there’s a risk of a stodgy oligopoly, grey with very little variation,” he continued.
Webb was also critical of current plans to implement the Value for Money framework, particularly in light of initiatives to encourage DC plans to invest more in UK private markets.
“Value for money as a concept is good. I think the way they’re doing it isn’t brilliant,” says Webb.
“The government wants schemes to invest in private markets and infrastructure, some of which can have a J curve pattern of returns. You can lose money in the early years, but do really well later on. You’re a big pension provider, and you invest in these kind of assets, your one year returns could be appalling. A VfM analysis could point to apparently poor performance, and due to an investment in private markets, your rating has just gone amber,” he continues.
The former pensions minister pointed to the Australian system as a potential warning to any UK VfM system, noting that there was currently “benchmark hugging” due to the fact that “the reward for being top of the pile is marginal. The penalty for being bottom of the pile is existential.”
Webb was pensions minister during the Conservative-Liberal Democrat coalition of 2010-2015. This era saw the passing of the 2014 Pensions Act, which looked to solve the small pots issue through so-called “magnetic pensions”, or savings pots that would follow a worker through their entire career.
However, this plan is yet to fully materialise. “Now more than 10 years on, we’ve made almost no progress,” says Webb. “Obviously the Pensions Dashboard initiative will help, but all the dashboard will do is show you what you’ve got. It doesn’t consolidate for you.”
Industry figures continue to solve the small pots pensions issue parallel to planned government reforms, including debate on a “big red button” to consolidate small scale savings plans.