Former pensions minister Guy Opperman has called for workplace pensions consolidation to be accelerated and extended to include commercial providers and even regulators.
Speaking at a roundtable discussion hosted by Tor Consulting last month, Opperman also warned that the proposed Value for Money framework would fail to achieve its objectives.
“What is needed is value for money tests and league tables requiring merger for the poorest performers, and for trustees to become more professional,” said Opperman.
“We should also push for more mergers among master trusts, with those responsible being held to account.”
With master trust performance ranging from around 11% a year to less than 3%, Opperman said he would prefer to see that market limited to no more than a dozen. The Pensions Regulator’s (TPR) list of registered master trust currently contains 34 providers.
The Pensions Regulator should also be the sole authority with regulatory oversight, Opperman said, bringing an end to the Financial Conduct Authority’s (FCA) involvement. He claimed the FCA considered pensions to be “a complete side issue”.
All UK corporate funds should also be consolidated, the former minister argued, because “they are too small and poorly performing”. He cited Australia’s defined contribution (DC) system as an example of what can be achieved from strong regulation, consolidation and the benefits of economies of scale.
The government should also consider issuing what Opperman referred to as “proper green gilts” for large infrastructure projects such as new nuclear, to support long term asset funds and other productive finance goals.
“We should ask ourselves how investment in DC is so different in the UK,” he added, pointing out that the Mansion House Compact signatories have pledged to allocate 5% of their portfolios to UK productive finance, “while Australia is investing well over 50%”.
Lessons from Down Under
Speaking at the same event, Nick Sherry – former Australian pensions minister and chair of TWUSuper – said that within any system with some level of compulsion, government has a “duty of care” to “ensure that outcomes for DC members are maximised while the cost to employer in the case of defined benefit (DB) is minimised”.
The Australian system – founded on UK trust law with a fiduciary duty to maximise member returns over the long term with appropriate diversification – has determined the best outcome after fees and charges was approximately 60% equities, 10% to 15% infrastructure, 10% to 12% property, 5% alternatives, and 10% or less in bonds and cash.
Sherry said that “as a consequence, the social purpose is achieved but also an important economic and investment outcome” for the nation.
In addition, he said a single regulator – the Australian Prudential Regulation Authority – has driven higher standards a single licensing structure and rigorous enforcement.
This involves the licensing of trustees, full transparency of all fees, returns and expenses data, and benchmarking of all fund investment options. Funds are removed when performance is sub-optimal.
This has “maximised returns, after fees, to members in DC and minimised costs to employers in DB”, said Sherry, while also achieving the outcomes the regulator is encouraging within the UK system.
“There is a strong relationship between larger scale and return outcome via reduced asset management and provider fees,” said Sherry. “Major fund consolidation has resulted in almost every fund below A$20bn [£10.1bn] being closed or in the process of closing.”
TWUSuper is currently in the process of merging with Mine Super to create a fund with more than 150,000 members and assets in excess of A$21bn.
The economies of scale achieved through consolidation in Australia have resulted in greater investment in non-cash and bond sectors such as infrastructure, which fully aligns with the ambitions of the current and previous UK governments.
This approach “would have a significant and major positive impact on both return and investment in the UK”, said Sherry, despite the differences between the two systems.
Further reading
DC consolidation: A complex picture (23 April 2024)
Time to consolidate the regulators? (18 March 2024)
TPR boss outlines consolidation drive (13 March 2024)
