Industry calls for incentives and M&A regs over mandation
Image: pdimaria/Pixabay
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
The pensions industry says larger schemes offer governance and investment benefits but warns the government against bringing in a requirement to invest in UK assets, in response to a call for evidence closing on Wednesday.
The government launched a call for evidence to inform the first part of its pensions review – now a ‘pensions investment review’ – on 4 September, giving stakeholders just three weeks to respond.
Focussing on defined contribution schemes and the Local Government Pension Scheme, the call for evidence asked five questions on scale and consolidation, two on costs versus value, and three on investing in the UK.
The government launched a call for evidence to inform the first part of its pensions review – now a ‘pensions investment review’ – on 4 September, giving stakeholders just three weeks to respond.
Focussing on defined contribution schemes and the Local Government Pension Scheme, the call for evidence asked five questions on scale and consolidation, two on costs versus value, and three on investing in the UK.
Legislation is needed, says SPP
The Society of Pension Professionals agreed with government that scale can offer investment options but warned of a ‘too big to fail’ risk and complacency. It also believes legislation is necessary to better facilitate consolidation.
SPP president Sophia Singleton said: “The SPP response to the government call for evidence has sought to be constructive in not only highlighting some potential pitfalls and areas that will require attention, but potential solutions.”
Among others, it said the legislation available in the DC market is not conducive to consolidation, as the authorisation regime for master trusts – the only one overseeing master trust consolidation – was designed for distressed situations. It is calling for some easing or alternative regulation to make acquisitions less time-consuming and costly.
On the LGPS side, pooling has been successful but “there is more to do”, the society argued.
“The belief that consolidating into fewer, larger LGPS funds will result in increased investment in UK assets is far from guaranteed,” the SPP said, believing that investment decisions and risk appetites might not change with scale “without corresponding changes to governance structures and fiduciary duties”.
SPP president Sophia Singleton said: “The SPP response to the government call for evidence has sought to be constructive in not only highlighting some potential pitfalls and areas that will require attention, but potential solutions.”
Among others, it said the legislation available in the DC market is not conducive to consolidation, as the authorisation regime for master trusts – the only one overseeing master trust consolidation – was designed for distressed situations. It is calling for some easing or alternative regulation to make acquisitions less time-consuming and costly.
On the LGPS side, pooling has been successful but “there is more to do”, the society argued.
“The belief that consolidating into fewer, larger LGPS funds will result in increased investment in UK assets is far from guaranteed,” the SPP said, believing that investment decisions and risk appetites might not change with scale “without corresponding changes to governance structures and fiduciary duties”.
Renewed fears of government overreach on investments
Fears over investment mandation abounded last year, with some suggesting the former government was eyeing a command economy, until former chancellor Jeremy Hunt said the government cannot direct the private sector. Whether fiduciary duty is different for the LGPS is something the LGPS Advisory Board is potentially seeking a legal opinion on.
Fiduciary duty requires trustees to invest in members’ best financial interests. Against this, the SPP highlighted the FTSE All Share Index grew by 63% in the decade to 31 December 2023. Over the same period, the MSCI World Index produced cumulative returns of 215%.
Performance and fiduciary duty are seen as a problem, but there is also a lack of incentives and opportunities, according to others. The Investing and Saving Alliance believes investment in the UK should be incentivised rather than achieved through compulsion, suggesting measures like reinstating the dividend tax credit or scrapping stamp duty, and called for an increase in the number of UK investment opportunities.
"At the heart of every pension scheme is the duty to safeguard members' financial futures. If we want to see more investment directed into UK opportunities, we need smart, targeted policies that balance risk and reward, while ensuring members always receive the outcomes they deserve,” said head of retirement Renny Biggins.
He also stressed that despite the governance advantages of large schemes, smaller ones offer closer ties with employers and greater engagement, “often exceeding what master trusts and GPPs can offer”.
The question of liability is also weighing heavily on investment decision makers. Pension provider Aegon argued that requiring government bodies to invest more in UK productive assets “poses major risks”.
“The government could set an overriding requirement that a minimum percentage of assets had to be invested in UK productive assets. But this has the potential to backfire on the government, if it is viewed as people’s pensions propping up the UK economy, or in future if such asset classes underperform,” said pensions director Steven Cameron.
“The government could set an overriding requirement that a minimum percentage of assets had to be invested in UK productive assets. But this has the potential to backfire on the government, if it is viewed as people’s pensions propping up the UK economy, or in future if such asset classes underperform,” said pensions director Steven Cameron.
He added it was ironic that another government initiative – the new value for money framework – could work against greater investment in productive assets because of its peer comparisons, potentially making schemes unwilling to take outlier positions.
What are your thoughts on the government’s consolidation drive?
