Inside the Mansion House summit

The so-called Mansion House reforms sent seismic waves through the pensions industry – while pulling the rug from under the Pensions Regulator’s (TPR) new DB funding code – when they were announced by chancellor Jeremy Hunt in July.

The great and the good of the pensions industry returned to the Mansion House in late October for a high powered summit on how the reforms might work in practice. 

Those hoping to hear the proponents of reform putting some flesh on the bones, or even debating some of the finer details, would be disappointed. This was not to be an opportunity for the industry to run a slide rule over the government’s or regulator’s workings out.

Instead, according to insiders who attended, it was a talking shop for pension and investment industry grandees to throw around ideas that would be captured for consideration in the chancellor’s autumn statement, due later this month. 

The devil is in the detail

Mark Austin, pension and insurance executive at Northern Trust was pleasantly surprised when the chancellor positioned the UK against other nations.

He recognised the potential opportunities, but noted that the devil is in the detail: “There are some really decent potential investment opportunities and there’s a pool of money that’s looking at the long term. Getting those two together is going to be the real challenge. 

“We need to get the operational guts of the industry together now to make sure that we get the right product, with the right liquidity, in the right place for the members.”

Things must change

Matthew Arends, head of UK retirement policy at Aon, said the chancellor’s plans rest on economies of scale that may be achieved by TPR’s campaign to consolidate smaller schemes. “He is looking for fewer, but larger pension schemes, because the scale will provide the opportunities,” but will not go as far as making any of his plans mandatory.

“Rather, he’s encouraging either direct consolidation, or working together for investment partnerships, for example, to drive the scale,” said Arends.

So, while the chancellor’s policy will fall short of forcing schemes into his preferred options, he made it very clear that change must come, added Arends. “The status quo is not an option”.

Trustees are not the problem

Part of that status quo is the role of trustees. Both the chancellor and TPR have been critical of trustees, but not all schemes are under the governance of trustees.

“About half the of DC money sits in contract pensions, and it’s the employer that makes decisions, said Pete Glancy, head of pension policy at Scottish Widows.

Even if these are consolidated into mastertrusts, that decision will be taken by employers and their concern may be to run the scheme at the lowest cost. And while increased freedom to invest in illiquids may produce better outcomes, does that mean schemes would choose to invest any of it in the UK, questioned Glancy. Funds need to invest in the places that deliver the greatest returns to their members.

A long and winding road

The opportunity for schemes – particularly defined contribution (DC) – to have greater freedom to invest in private assets or productive finance was warmly welcomed, but even if the investment culture changes, it won’t happen overnight.

Stephen Budge, partner and head of DC investment strategy at LCP said there is “definitely room for more private market allocations” and was heartened by a presentation by the Australian fund Aware Super that has allocations of around five percent in private equity and much more generally in private markets. However, even those who want to make changes now will find that this won’t be an overnight process.

“We have several clients who are now ready to press the button,” said Budge, “and that’s a 12 month journey from start to finish outside of any standard reviews.”

Timing it with a triennial review would make sense, added Budge. He is among those who see the FCA-approved long term asset fund (LTAF) as the obvious choice for these assets to be held for pension funds.

Liquidity, liquidity, liquidity

Nick Groom, head of UK DC at Natixis has long advocated illiquid assets for DC funds, yet he raised concerns about the remaining obstacles which had generated little discussion – price and liquidity.

The greater focus on value means that any benefit from illiquids is expected to be generated by scale alone. Neither tax breaks nor much fee headroom has been offered by the government or regulator to encourage managers of private assets to service this new market.

The industry must also drop its “pious”, “over my dead body” attitude to performance fees, said Groom. There needs to be a dialogue between schemes and managers, or else those prepared to pay more will seek the best, who will become more oversubscribed.

Groom also questioned the merits of the LTAF structure, as structures already exist that offer access to credit with daily liquidity: “Under an LTAF, it can be 120 days before you get anything out, so it doesn’t solve the concerns about liquidity.

“It is a structure and regime that appears to be fully backed by the UK regulator and manages some of the problems with permitted links.”

Progress is being made

Pensions Expert spoke to many industry experts in attendance at the summit who took the chancellor’s “all in it together” rhetoric with a pinch of salt.

“After all,” said one, he’s leading by example but with somebody else’s money when it comes to the local government funds”.

Glancy at Scottish Widows shared a similar view: “It doesn’t reassure [those in our funds] that they’ll be better off in retirement because someone says the government in office is leading the way.” 

Even the MPs’ pension fund cannot be shown to be following the Mansion House momentum, as a recent article in Financial Times showed that it trailed the average UK DB scheme with just 1.7% invested in UK-listed companies.

Yet there was a general feeling from all in attendance that momentum is gathering behind the chancellor’s ideas and that they will lead to a more creative period for pension fund investing that will deliver better long-term value for members.