DC scheme performance is government’s responsibility, says Bell
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Pension savers in different defined contribution schemes should not be exposed to a range of returns over time, the pensions minister has said, adding that the worst performers will “need to consider their position”.
It is for the government to ensure pension savers get “the best possible” returns in their DC schemes, because the government is making them save for retirement, Torsten Bell told an audience at the Trades Union Congress Pensions Conference on Wednesday.
Stressing that workers bear the investment risk in DC schemes, he said: “It's our job to make sure they get the best possible returns, and we can't have this level of variation over time.”
Bell added: “The worst performing schemes will need to consider their position, because we can't have savers that the government has basically soft-mandated into savings not getting returns on what they are putting in.”
Figures analysed by the Department for Work and Pensions show the average five-year annualised return of DC master trusts and group personal pensions for a saver 30 years from retirement stands at 7%, ranging from 4% to 11%.
The figures appear identical to a set presented in a DWP paper in November but stripped of information that would show performance together with the asset size of master trusts and providers. In combination, the data suggests that there is “weak correlation between the asset size of Master Trusts / GPPs and 5-year gross investment performance”, according to the DWP, though it hastened to add that the sample size is small.
The government is due to respond to a consultation on mandating a minimum size for DC default funds, saying bigger pension funds will lead to better outcomes.
Noting that there is already widespread consolidation in DC, Bell said: “What we are doing as a government is to give that a little helping hand.”
"Fewer, bigger, better pension funds" are needed to improve governance and asset mix, he argued, emphasising that Australian and Canadian schemes have higher allocations to private markets than UK schemes.
“We cannot have our pension schemes that are just investing in equities and bonds, which is what too many DC schemes are doing today,” Bell said.
'We need to think about this adequacy question'
The pensions minister touched on adequacy but did not reveal when or how the government plans to address this, other than by nudging schemes to expose savers to higher risk assets.
"We need to think about this advocacy question,” he said.
Adequacy should consider different groups and their replacement rates, as well as their nominal incomes in retirement, he remarked: “Both of those things are important. We need to wrestle with both of them."
What are the risks in seeking to reduce variation of DC returns?
