As the government moved forward with its plans to overhaul the DC workplace pension sector this week, concerns have been raised that the “reserved powers” included in the plans have the potential to negatively affect savers.
Details of the changes were published in the government’s final report on the Pension Investment Review, following a consultation.
Under the plans, pension megafunds of £25 billion will be created. The idea is that these megafunds will lead to better outcomes either through greater economies of scale or by just being large enough to take advantage of the investment opportunities that require greater scale.
For example, larger funds can leverage their size to invest in a fuller range of asset classes, including specialist private markets such as venture capital, infrastructure, property and private credit. The idea is that these assets have higher growth potential, which, in theory, will improve the return for savers.
In Canada, where larger schemes leverage their scale, the schemes invest about four times more in infrastructure than UK DC providers.
There has also been a push for greater pension fund investment in the UK. There were suggestions that if pension funds did not willingly invest in the UK, then government investment mandates may be required.
However, the recent signing of the Mansion House Accord by 17 major pension providers prompted the government to say: “It is not necessary currently to mandate investment.”
Accord signatories voluntarily agreed to invest 10 percent of their main default funds in private markets, including 5 percent in the UK specifically.
However, the chancellor has reserved powers “to set quantitative baseline targets for pension schemes to invest in a broader range of private assets, including in the UK, for the benefit of savers and for the economy”.
The government said it “does not anticipate exercising the power unless it considers that the industry has not delivered the change on its own, following the Mansion House commitments”.
“The reserve power within the bill will include provisions and safeguards to protect savers’ interests. Any requirements under the reserve power will be consistent with the principles of fiduciary duty,” the report said.
But critics cautioned that mandating pension schemes to invest in a particular way poses risks to savers.
“The main concern for schemes following the government’s wide ranging pension announcements is the looming threat of ‘mandation’,” said Matt Tickle, chief investment officer at Barnett Waddingham.
“While the chancellor’s ‘backstop’ power – which could compel funds to back British assets – appears to have deterred that threat for now, any move towards mandated investment is a blunt tool, leaving members and society as a whole at risk of poorer outcomes.
“That said, the fact that there is time gives some of the government’s better policies, around planning reform, value for money and retirement pathways more space to succeed. If they do, they could generate opportunities that pension schemes will willingly invest in. Efforts to improve the flow of investable opportunities are certainly positive, however there is still an urgent need to focus on reforms rather than enforcing mandates.”
Julian Mund, chief executive of the PLSA, said: “We believe that the best way of ensuring good returns for members is for investments to be undertaken on a voluntary, not a mandatory basis. We are confident, following the signing of the Mansion House Accord in which large DC schemes undertook to increase UK investment, that mandation will not be necessary. Any government intervention to direct how savers’ money is invested is risky.
“If government doesn’t create the right environment with a suitable pipeline of investment opportunities, it would involve downside risk for scheme members. Trust in the system could also be impacted. Trustees are there to do what is best for savers. Any reserve power on mandation must be drafted with extreme caution.”
Tim Box, chair of the PMI Policy and Public Affairs Working Group, said: “Whether greater scale means that investments would actually be directed into the UK remains to be seen. For those running UK pension schemes the ultimate responsibility is to act in the best interests of members.
“Pension funds will invest where opportunities align with long-term value and security. We look forward to seeing details of how the reserve power to set binding asset targets will work and the impact this will have on decision making.”
He warned that the timescales for these ambition proposals are “relatively short”.
“Rushing change risks confusing savers and undermining confidence in the system. Any reforms must be structured to ensure clarity, stability, and a smooth transition for members,” Box said.
Emma Martin, senior counsel at Sackers, said: “Although the government says that any requirements under this reserve power would be consistent with trustees’ fiduciary duties and that it does not anticipate exercising this power unless it considered the industry has not delivered this change on its own, this is a significant intervention which has already been questioned in some quarters. We eagerly await further details of this power.”
