Debbie Webb of the Institute and Faculty of Actuaries calls for a reasonable and considered approach to achieving scale, with the needs of members at the centre.
Ensuring adequacy of income in retirement for all is the biggest pensions challenge facing us today.
The government’s Pensions Review has been delayed, so uncertainty remains over future plans, and this month a new pensions minister takes up the challenge of finding answers.
It is clear that the government needs to find ways to generate economic growth, and it sees the £2.5trn invested in workplace pensions assets as key to that mission.
The Institute and Faculty of Actuaries is supportive of the chancellor’s efforts to stimulate more growth in the UK economy. We question, however, whether the current pensions proposals, which focus on establishing ‘megafunds’ of greater scale in defined contribution (DC) schemes and local government pensions, will reliably achieve these aims.
Savers’ needs front and centre
We hope that the government recognises that the foremost purpose of these assets is and will always be to provide security in retirement for the members and their dependants.
When it comes to DC savers, their needs should be the driving factor in investment decisions.
Most of the pensions industry will have responded to the government’s consultations on the above that closed on 16 January.
There is no doubt that appropriate, well diversified and well managed growth-seeking investment strategies are key in achieving adequacy in retirement for DC scheme members. The consultation is a good starting point for government and industry to consider how best this is achieved.
In our view, the continuation of current DC consolidation trends is desirable to achieve good governance, ensure economies of scale and enable investment in a wider range of assets.
Achieving scale
If the government is keen to significantly accelerate this, applying a minimum asset size would be a blunt but effective way to achieve scale.
However, it could introduce new risks and unintended consequences, including lack of competition, disincentives to innovation and barriers to entry for new entrants to the market. It also raises the chances of herding behaviours among providers and could increase systemic risks.
There is no compelling evidence that very large funds would necessarily have a much greater home bias in their investments, or a greater investment in ‘productive assets’ than currently.
In addition, focusing on the number and size of default funds is misplaced. Default funds often invest in larger, underlying pooled assets, and it is the efficiencies and operation of these underlying pooled assets that matters.
Restricting defaults could also mean that members do not have a default option most appropriate for them.
We believe that a focus on establishing a clear Value for Member framework for all DC arrangements would be a more balanced approach. This would include a requirement for regular review and for any scheme that does not meet the standards to improve or consolidate.
This would still drive consolidation but avoid introducing barriers to entry and continuing to reward innovations that improve overall value for pension scheme members.
If the government wishes to increase investment in specific UK asset classes, then this could only be directly achieved by mandating allocations to these asset classes.
Creating incentives for investment in certain assets would also influence behaviour in a measurable way and would be an approach more likely to be aligned with good member outcomes.
We hope the new pensions minister approaches these challenges with an open mind and a flexible approach to growth, so that a way forward can be found that is in the interests of both DC savers and the wider UK economy.
Debbie Webb is chair of the Pensions Board at the Institute and Faculty of Actuaries.
