Hours before TPR’s announcement , a “challenge” letter appeared on the Government website. It challenged UK pension funds, both DB and DC to
To seize this moment, we need an Investment Big Bang, to unlock the hundreds of billions of pounds sitting in UK institutional investors and use it to drive the UK’s recovery. It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country
It explains the Treasury’s efforts to make this happening , pointing to the issuance of the first green gilts in September , the launching of the Long Term Asset Fund as a new investment vehicle in the autumn and relaxation of solvency II rules to let insurers participate.
The letter says that the Government were under pressure to mandate investment in these areas but chose instead to encourage a “change in mindset” among institutional investors.
Choosing which assets to invest in to secure the best outcomes remains a matter for pension fund trustees, and other custodians of institutional capital. We recognise that there is no single ‘right answer’ for the amount that should be invested in these long-term asset classes. Some funds are already highly active; some – for good reason – are not. You will know best what is right for your business– whether that is committing to invest a greater proportion of your capital in long-term UK assets, establishing the vehicles to allow others to do so, or
providing the necessary specialist advice. But we strongly believe this is a question that all institutional investors should be considering.
It looks as if that change of mindset has applied to the Pensions Regulator too.
Understanding the DWP’s position on consolidation
Many have questioned the motivation of the DWP to accelerate the consolidation of smaller DC schemes into master trusts and other multi-employer schemes.
The language used by the DWP is the language of the Treasury, it is about removing barriers to change, changing mindsets and building back better.
The investment big bang, envisaged by Johnson and Sushak needs to be not just in the interests of the larger British economy, it needs to be in the interests of DC savers and the funders of DB plans. It needs to result in higher inflation adjusted returns on the way up and better pensions in retirement.
The investment big bang is likely to accelerate a move towards collective pensions arising from DC saving – aka the use of Collective Defined Contribution within master trusts. The long-term nature of the illiquid investments envisaged is aligned to the long term time horizons of pension schemes (as opposed to retirement savings schemes)
How does this change our view on value for money?
To date, the value for money equation has centered on costs , charges and the features of a pension scheme.
If we are to have a change in investment mindset, it needs to include a change in how we value our pensions.
It appears that the FCA have pushed back its publication of its response to its consultation of CP20/9 (on value for money) and I fully expect it to include a measure of value that reflects the change of mindset. Will the FCA go so far as to say that DC Pension Schemes that do not invest assets in private markets are not offering their members value?
Stranger things have happened, including the U-turn from the Pensions Regulator.
The change of mindset , if it is really matter, must happen among savers too.