Government plans to encourage wider pension scheme investment in the UK economy need to put better outcomes for savers first, according to a new report from the Association of British Insurers.
While it welcomes measures to boost UK investment, the trade body for the pensions and insurance industry pointed out that there needed to be important safeguards for savers.
The body has compiled a list of shorter-term and long-term recommendations to ensure savers’ interests remain at the heart of future proposals to boost investments into UK start ups and the wider economy.
The report, ‘Investing in our Future: Delivering for Savers and the Economy’ says the government needs to learn from and build on the long-term investment for technology and science (LIFTS) initiative to encourage further investment in the UK.
The ABI added it is important to ensure regulation makes it as easy as possible to invest in illiquid assets, including through Long-Term Asset Funds. It has also called for a “transformation of the culture in defined contribution (DC) pensions” from focusing on keeping charges as low as possible, to prioritising value for money.
The report says: “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.”
It added that the FCA needs to work with the industry to ensure that the ‘permitted links’ rules do not constrain firms from making investments into illiquid assets which might include the government’s proposed LIFTS scheme.
The ABI added that new Long Term Asset Funds (LTAFs) are only just becoming to emerge, and there is a need for the government to review how these are working to date.
The ABI added: “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.”
In terms of longer-term recommendations for the pensions industry the ABI suggests looking at whether the Pension Protection Fund could act as a DB Master Trust and whirler further consolidation across the 86 local government pensions funds (LGPS) might be appropriate.
It also also calling on the government to 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, and fradually raise employer and employee contributions to DC schemes over the next 10 years to 2032 to 12 per cent.
ABI director of policy, long-term savings, health & protection, Dr Yvonne Braun says: “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.”
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