“Patient Capital incubators” wanted. Our workplace pensions fingered!


The DWP and its pension minister Guy Opperman have taken the opportunity of a speech at the TUC conference to launch an unexpected and wide-ranging consultation on DC investments- where the money of “a couple of hundred short of 10m new savers is going”.

The consultations snappily called;

Investment Innovation and Future Consolidation:

A Consultation on the Consideration of Illiquid Assets and the Development of Scale in Occupational Defined Contribution schemes

At the moment, the money is going into the market via index-tracker funds mainly run by L&G, BlackRock and State Street.

The DWP and the Treasury want this money to be invested in patient capital and so do I. Rather than heading off around the world without much regard to environmental , social of governance considerations, this money should be invested with a social purpose.

If you want to read about Patient Capital, this presentation by Nigel Wilson of L&G is a great way of getting started.

The problem with commercial pension providers

Give NEST a tax-payer subsidised £1.2bn loan and you’re likely to get an investment strategy that fulfills the long-term aspirations of the Treasury and DWP – who collect and spend our taxes.

But if you don’t give the competitors the same loan and then expect them to behave in a non-commercial way, you get this kind of response

NEST has been given the financial incentives to think long-term, its competitors have been given a financial straight-jacket called the charge cap.

The problems with and of commercial providers are the need to return money to shareholders or (pace Gregg) at least to stay solvent. These are not easy problems, especially when you have the Government yapping at your heals over master-trust authorisation , legacy and goodness knows what rules surrounding governance.

Can patient capital be commercial?

There is strong evidence that investing in the kind of things that “patient capital” represents, will produce stable long-term returns for pension funds. Ironically, the kind of income streams patient capital produces are ideally suited to the payment of pensions. I say “ironically” as this is not something that DC pensions do any more. Instead they give you the option of transferring into something else like a SIPP or a bank account (or -say it quietly) an annuity.

Of course we are likely to get a kind of DC scheme that does pay pensions – it’s called CDC or Collective Defined Contribution and it CDC isn’t investing into patient capital, I’ll be asking why. One of the reasons is that CDC will be subject to the charge cap and as patient capital is managed with “performance fees” , it’s quite likely that – until the ideas in this consultation are considered and implemented – CDC schemes will have to do without,

So the argument that the Government is putting forward is to allow the kind of fees that surround patient capital – special dispensation from the charge cap.

The “special assessment” proposed for trustees who use patient capital but pay managers on a performance basis sounds complicated and is complicated, Whether they are necessary I very much doubt, the cost of running the kind of large DC fund that the DWP has in mind for this patient capital idea, aren’t very high and most of these funds are operating well within the charge cap.

The historic issue for the large DC trusts – is why they should put at risk future margins or solvency by investing in assets where the cost of management is underwritten by them. This is what the special assessment is designed to combat and I dare say it will ease the minds of CIOs like the People’s Nico Aspinall and the clever single occupational schemes like Mark Thompson (HSBC) and  Ian McKinlay, (LBG).

Big is beautiful

The DWP have a second bright idea. Having worked out that the only DC pension schemes that will invest in patient capital are big pension schemes, they have decided that this is an opportunity to incentivise further smaller occupational pension schemes to pack it in.

As far as I can see, this is through the gap that will develop between big schemes who will be investing for good, and small schemes that can’t afford to. The game is to get the small scheme trustees to explain to tPR and the members why they don’t pack it in and allow the member’s money to be managed in a more responsible way (by a big scheme).

This is not as bad a tactic as you might think. While most young people don’t give retirement much attention, they do get very excited if they find out their pension schemes is not being invested in a responsible way. If the only DC pension schemes that invest responsibly are those big enough to get involved in all this ESG stuff, then members have got every right to turn round to their trustees and ask them to show the colour of their money. If the colour of the money isn’t green – woe betide the trustees,

Not a full report – but full enough

I will give this consultation  more attention and I will return to it again because it looks like it is packed with good ideas.

Consolidating DC into big DC is a good idea – most small occ DC schemes are vanity projects.

Allowing performance fees a “special assessment” looks a good idea – so long as it isn’t a charter for dumb-arse comedian fund managers to take the Michael.

Excluding contract based workplace pension schemes from this is a dumb idea. IGCs are no different from Trustees, default funds for GPPs look very much like Default funds for Occupational DC funds. I don’t get the exclusion.

But the GPP issues are really for the Treasury and FCA. The DWP team who are leading this work are well ahead of the curve and where they lead, the Treasury will follow.

The full report just looks at pensions, not one half of pensions – which are controlled by the DWP. This is why I call this less than a full report. But in tackling a big issue at some length, in some detail and with sensible conclusions – this looks a helpful addition to the gallimaufry of consultations currently underway!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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