Efforts to attract further investment in the UK economy must be part of a long-term strategy with savers at its heart, according to the Association of British Insurers (ABI).
As the government looks to spur economic growth, attention has turned to whether pension savings can channel more money into UK companies. While pension schemes do already invest a great deal in the UK, the litmus test for any new policies must be that they deliver better outcomes for savers.
In our latest report ‘Investing in our Future: Delivering for Savers and the Economy’, we’ve called on government to put savers’ interests first and set out how it can enable and encourage more investment in the UK. This should include:
- Learning from and building on the Long-Term Investment for Technology and Science (LIFTS) initiative to encourage further investment in the UK.
- Ensure regulation makes it as easy as possible to invest in illiquid assets, including through Long-Term Asset Funds.
- Transforming the culture in the Defined Contribution (DC) market from focusing on keeping charges as low as possible to prioritising value for money.
Encouraging investments through incentives and regulation
It is possible for pension schemes to both invest more in the UK and continue to deliver the best outcomes for savers, but savers’ interests must come first. If the government wants to boost further UK investment, and peoples’ savings, it should focus on making the UK a more attractive market and create incentives for pension schemes.
Initiatives which pool both government and pension scheme funds, such as LIFTS, have the potential to encourage greater investment in illiquid assets. By developing further initiatives that use co-investment as an incentive, the government could create opportunities for pension funds to put more money behind assets that align with its wider policy objectives. For any investments that are expensive and / or riskier, such incentives would shift the balance of risk and reward, improving the value for savers, and making them more attractive to schemes.
New Long Term Asset Funds (LTAF) are only just beginning to emerge following years of extensive work on Productive Finance between government and industry. The government should focus on reviewing how LTAFs work and ensuring regulation makes it as easy as possible to put money into illiquid assets.
LTAFs have specific uses and restrictions in DC pensions, and they avoid the FCA's limits on what firms can invest in, known as permitted links. But firms may wish to make specific illiquid investments outside of LTAFs, including the government’s proposed LIFTS scheme. The FCA should work with the industry to ensure the permitted links rules do not constrain firms from making these investments.
End “cost is king” culture
To empower DC schemes to invest more in alternative assets, such as private equity and venture capital, we must end the current “cost is king” culture in the DC market. As it stands, there is a stronger focus on charges rather than on the value a scheme provides for its members, limiting the assets that providers can invest in.
It is encouraging that regulators and government are already shifting focus away from solely being about cost, for example through the recent consultation on a value for money framework. The Pensions Regulator (TPR) should also review and update its DC investment governance guidance to encourage trustees to focus on overall value. Similarly, both TPR and DWP’s default fund guidance should incorporate the framework – once finished – to rebalance the focus on costs towards a more value orientated approach.
If DC schemes can’t demonstrate value for money to regulators, there should be swift and decisive action to consolidate them.
Long-term plan for long-term assets
Interventions in how and where pensions are invested need to be well thought through to avoid any unintended consequences, such as having too much money (and therefore risk) placed in any specific firm or sector.
But most importantly, the purpose of pension investment is securing savers’ standard of living in retirement. Pension investments endure for decades, far beyond the duration of governments. That is why it is vital that any changes are part of a long-term strategy for pensions which should be developed on a cross-party basis.
Dr Yvonne Braun, Director of Policy, Long-Term Savings, Health & Protection, ABI, said:
“We have long been campaigning for people to pay attention to their pensions, and we welcome the government’s appetite to increase investment opportunities for pension schemes. The purpose of a pension is of course to secure a saver’s standard of living in retirement, so the test for any new policies must be that they deliver better outcomes for pension savers.
“The UK market can be made more attractive for pensions, for example through co-investment from government in certain sectors. It is also crucial that the auto-enrolment pensions market starts to focus on value rather than price. But pensions are for the long-term, so any more far-reaching changes need to be part of a long-term strategy that is joined up across government and can command cross-party support. Our industry will continue to proactively engage to help bring about this long-term strategy.”
Short-term recommendations
- Learning from and building on the Long-term Investment for Technology and Science (LIFTS) initiative to encourage further investment in the UK.
- Ensure regulation makes it as easy as possible to invest in illiquid assets, including through Long-Term Asset Funds.
- Transforming the culture in the Defined Contribution (DC) market from focusing on keeping charges as low as possible to prioritising value for money.
- Use DWP and FCA’s value for money framework to drive value and where DC schemes are not providing value, consider consolidation.
Long-term recommendations
- Where DB schemes are stressed and buy-out is many years away, consideration could be given to a wider role for the UK’s pension lifeboat, the Pension Protection Fund (PPF), to act as a DB Master Trust. But the link with employers must remain and full benefits must be paid to prevent moral hazard.
- Further consolidation is appropriate for the 86 Local Government Pension Funds (LGPS) which together administer c.£400 billion in assets for the retirements of local authority workers.
- Press ahead with plans to increase automatic enrolment contributions by removing the lower earnings limit and by lowering the automatic enrolment age from 22 to 18.
- Gradually raise employer and employee contributions to DC schemes over the next 10 years to 2032 to 12%.
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