The government has two over-riding priorities for the occupational DC market in the year ahead: encouraging more investment into ‘productive finance’, and accelerating consolidation, particularly among smaller pension schemes.
Speaking at the Corporate Adviser Summit, the Department of Work & Pension’s DC investment and governance, private pensions policy adviser Andrew Blair, explained the government thinking behind these initiatives, and set out progress made to date.
He explained that the DC market was at a “seminal moment”, having grown rapidly in size since the introduction of AE. “The size and scale of this sector means we now have the attention of the most important decision makers and senior politicians,” he said.
This is clearly seen with the renewed focus on productive finance, with the Prime Minister publishing his ‘challenge letter’ earlier this year calling for pension schemes to invest in green projects and infrastructure to help the country ‘build back better’.
Blair says that while the government is keen to look at ways to help DC schemes invest in private markets and illiquid assets, there are no plans to make this mandatory. “This is not on the DWP’s agenda. It is not the role of government to mandate where schemes should be investing their assets. The fiduciary duty of trustees will remain paramount.”
However he said government can play a role in helping remove some of the barriers that have prevented DC schemes investing in these markets to date. “We think this approach has the potential to benefit members and help the economy. Both can be achieved.”
Barriers include cost, the issues around daily pricing, liquidity management and ensuring there is appropriate supply.
Blair described the over-riding focus on costs in the DC market as a “market failure” which was potentially hindering scheme innovation on this front. But he stepped back from recommending a rise to the price cap as a potential solution.
He said: “Cost does appear to be king in the DC master trust sector. But this is a commercial issue, rather than being solely related to the charge cap. Consultants and employers have a role to play in trying to address this issue along with asset managers, rather than it being for the government to resolve.”
He pointed out that the average cost of a medium to large master trust was now 0.4 per cent, with a smaller master trust and GPPs currently having an average ongoing cost of 0.5 per cent. Both are considerably below the charge cap of 0.75 per cent.
Blair adds: “Even if the charge cap changes, the commercial environment is based on competition on cost, and this focus on cost alone could persist.”
Rather than solely focus on cost, Blair says he would like to see a more emphasis on value for money, which would look at overall member outcomes. This could include data on in future on net returns. Recently published data suggests that the long-term performance of illiquid asset could benefit many pension scheme members.
Blair acknowledged that at present it is only the very largest schemes that have the scale and expertise to invest in less liquid assets such as infrastructure. With this in mind the government is looking at building scale into the DC market as well as widening access to illiquid assets.
This, he explained, dovetails with one of the government’s other priorities for the DC market: consolidation.
He says: “Consolidation is already happening in the market with a 8 to 10 per cent reduction in the number of schemes a year. We want to speed up this process though and have put out a call for evidence from the industry on how best to do this.”
As he pointed out schemes with assets of less than £100m will now have to conduct a new value for members assessment where they compare their own scheme with other a whole range of metrics. He says this will be a “tough test to pass” and there is already provision from the regulator for schemes to move towards consolidation prior to this test.
The weight of evidence suggests many schemes will fail this test, particularly those at the smaller end of the spectrum who are not meeting any of the key governance requirements for schemes.
Blair said that alongside that there would also continue to be a focus on climate change and stewardship. “This is a big priority for the DWP particularly ahead of COP26 in Glasgow next month.”
He adds that pensions schemes have a critical role to play when it comes to stewardship and influencing the companies they invest in. Increasingly he says this involves a focus on ‘social’ factors as well as issues relating to climate change and a company’s environmental track record.
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