The DB pensions industry, although unintentionally, operates in misalignment with the government’s productive finance agenda due to differing incentives.
This was the main takeaway from a WTW presentation at the Pensions and Lifetime Savings Association (PLSA) annual conference by head of retirement Rash Bhabra and head of GB clients Piter Steyn.
The presentation discussed the proposed changes in the Mansion House compact, exploring its impact on investment strategies, member outcomes, and potential government actions.
Steyn highlighted the use of ‘productive finance’ a term not used much in the industry and refers to typically illiquid assets that “make a difference to the real economy and generate a return every time.” He explained: “There isn’t an opportunity to buy and sell it day to day and so you must hold it for the long term in order to harvest that higher expected return.”
The types of assets that are included in this definition according to Steyn are investments in early-stage start-ups or investing in companies that are more mature but haven’t yet listed in the public market. He also mentioned private debt, real estate and infrastructure showing that there is a spectrum of potential assets that could be used in this space.
Steyn said that though DB schemes have been allocating to these assets in the past there are now issues. He said: “We have on our hands a productive finance predicament. DB pension fund have stopped making allocations to these assets and they have actively reduced their allocations.”
Steyn recognised that the market has well-funded DB pension schemes with a “wall of money” that is currently derisking, becoming more liquid and funnelling into the insurer’s regime. Within the insurers’ domain, he pointed out a capacity challenge, stating that it will require some time for this “wall of money” to flow into the insurers’ sector and be reinvested in capital finance.
Bhabra also noted the need for consolidation however, he said there are too many schemes to be run effectively but that won’t make much of a difference to the productive finance agenda as the assets of those 1800 schemes are only at £15bn.
He emphasised: “At the smaller end you need consolidation. There are too many schemes that are too small to be governed effectively but it won’t make a difference to the government’s productive finance agenda. Consolidation at the small end will not make a difference at all but it should happen”
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