A new business ban for underperforming schemes and reporting requirements for UK investments could have significant negative effects on DC schemes.
Plans to place new business bans on poor performing defined contribution (DC) pension schemes could backfire and undermine the government’s goals, industry commentators have warned.
Chancellor Jeremy Hunt announced over the weekend that DC pension funds will be required to publicly compare their performance data against competitor schemes, including at least two schemes managing at least £10bn in assets.
The government said schemes performing poorly faced a ban on taking on new business from employers, with the Pensions Regulator and Financial Conduct Authority having “a full range of intervention powers”.
However, former pensions minister Sir Steve Webb, partner at LCP, warned that, while well-intentioned, the proposals risked having unintended consequences or being limited in their effect.
Webb said: “The threat of effectively shutting down pension schemes whose investment returns are relatively poor runs the risk of causing the whole industry to become very risk averse.
“Sometimes it is necessary to take investment risk to achieve the best returns but those risks don’t always come good. The penalty for being an outlier will be so great that this new approach could rein in the top performers as well as challenging the underperformers.”
Mike Ambery, retirement savings director at Standard Life, added that any performance framework needed to “focus on performance in the round”, including taking into account digital services and other indicators of customer service.
“We also can’t lose focus on the biggest single factor impacting people’s retirement outcomes – the relatively low levels of contributions they are making and what is currently required under automatic enrolment,” Ambery said. “We would like to see a regular government review of the contribution rates by employers and employees, considering the outcomes people are on track for.”
Investing in UK businesses
Other commentators warned that the planned requirement for schemes to report on their level of investment in UK assets.
Laura Myers, partner and head of DC at LCP, said the reporting requirement alone would “have little practical effect”.
“There are big issues about what counts as domestic investment and just having to report something will not in itself change behaviours,” Myers said. “Trustees will be looking for the best returns wherever they can get them, and publishing statistics on UK investments will not change that.”
Robert Wakefield, president at Pensions Management Institute, highlighted that the changes will compromise the control that trustee boards currently exercise over their investment decisions and could “adversely affect trustees’ fiduciary responsibilities”.
Under current rules, trustees must set out policies concerning the selection of investments in their statements of investment principles, and must also explain the rationale for their choices.
“Creating pressure on trustees to invest in UK equities to a greater extent than is the case currently would compromise their autonomy,” Wakefield stated. “As it is, it is hard to see how a meaningful ‘apples-with-apples’ performance comparison could be made.”
Giannis Waymouth, chair of the Society of Pension Professionals’ DC committee, argued that the reporting burden “appears to be disproportionate”. As most DC schemes were invested in unitised funds, Waymouth explained, underlying investments may change without trustees having full sight of exposures.
“The actual proportion held in UK equities for a particular member’s pot will vary by member as they get older and different investment drivers come into play,” Waymouth added. “Government must be careful that a new reporting obligation like this doesn’t have the unintended consequence of driving away investment from the UK due to the costs and complexity involved.”
