Andrew Bailey’s excursions into pension politics

A couple of months ago, Andrew Bailey spoke out against Superfunds which he claimed undermined the security of pensions by taking money away from insurers and  invested in the market for growth. He argued that this was weakening the protection for members of DB schemes.

Yesterday he was to be found demanding that Defined Contribution Pension Schemes (increasingly multi-employer master trusts) invest more in the market for growth. Presumably because they are more able to take the market risks he previously warned against.

Have pensions ever been so political?

This week the Government slammed a door in the face of peers and MPs looking to help DB pension schemes invest for growth by taking out an amendment to clause 123 of the Pension Schemes Bill.

Yesterday Boris Johnson suggested that double the £12bn invested by the taxpayer in his 10 point plan for a green industrial revolution could come from the private sector. His Chancellor had the previous week made it clear that he expected pension schemes to be major investors in his soon to be launched “long term asset fund” a means to invest in illiquids such as private equity and infrastructure.

Why DC – why not DB?

What is consistent about the Government’s position is that DB pensions, which amount to two thirds of the funding of private pensions (some £2 trillion) are not the focus of the DWP’s , the Treasury’s or the Bank of England’s attention.

The message is clear, these pensions are are not for long term assets – whatever Guy Opperman of his Pensions Regulator is saying. They are to be locked down by the new DB funding code with the keys provided TPR by the new powers in the Pension Schemes Bill.

By contrast, DC pensions, where liquidity is at a premium , are to carry the responsibility of funding the new green industrial revolution. The risks of illiquid investments going wrong are considerable – think Woodford. DC savers are to be asked to shoulder these risks. Meanwhile DB pensions are to be supported by spiraling deficit contributions from employers whose current employees are receiving defined contributions into their pensions.

It doesn’t take an economist to work out that if you ask ordinary savers to take more investment risk in DC and employers to take more of the funding burden in DB, then employers will reduce voluntary funding to DC schemes and members of DC schemes will start taking the very risks that Andrew Bailey was worrying about a couple of months ago.

The DC waterbed

Steve Webb used to talk about the waterbed principle. What he meant was that if you pressed hard on one part of a waterbed, you would see pressure rise on another. Pressure from investing in illiquids will feed through in higher costs (the DWP is planning to relax the DC charge cap to accommodate “less liquids”)  and in increased risk, specifically that default funds may have to gate withdrawals if levels of liquidity within the fund reduce to a level where claims cannot be paid).

Add to these risks, the burden on the providers of DC pensions of managing these extra costs and risks without falling foul of TPR and FCA solvency margins and you can see how the DC waterbed might eventually spring a leak.

I am not saying that DC pensions should not invest in illiquids, but believe that they need to be introduced properly, with it being made clear that DC savers are being asked to shoulder new risks and have the right to opt-out if they choose.

What’s this to do with the Bank of England anyway?

We have a muddled enough government interventions  in pensions as it is. The seeming trade off between the Treasury and the DWP, which saw superfunds introduced via the back door appears to have its counter-party in the DWP agreeing to force illiquids into DC. Andrew Bailey, with his Bank of England hat on, seems determined to interfere, first by trying to sabotage superfunds and now by supporting the DWP’s interventions into  DC investments.

Speaking at yesterday’s Corporate Adviser master trust event, David Farrar, who appears to be the DWP’s only alternative to Opperman as an articulate spokesperson of the department’s strategy, blew cold water on suggests that the government may compel pension schemes to invest in UK infrastructure as part of a post-Covid recovery plan.

“There are absolutely no indications to suggest that this is the direction of travel.”

With Andrew Bailey, Guy Opperman, Rishi Sunak and Boris Johnson all speaking to the same agenda, this oft-repeated statement is looking increasingly less likely.

What should happen?

My suggestion is this.

Firstly, the Pensions Regulator takes the hint from the consultation responses and from support for amendments to the Pension Schemes Bill to give open pensions freedom from fast track or fast track equivalence (the so-called bespoke funding track). The Pensions Regulator should encourage open pension schemes to invest in long term assets.

Secondly, the DWP needs to level with DC investors that it is looking to intervene in how their money is invested. It is no good continuing to lean on small DC schemes to consolidate and for large DC schemes to consider illiquids without being explicit about what is going on.

If the Chancellor wants pension schemes to invest in illiquids, then he needs to prevail on the Pensions Minister to relax the DB code – at the least for open schemes. If Guy Opperman wants large DC schemes to invest in illiquids, then he needs to make it clear how the DC waterbed works and why DC investors and providers should be expected to carry the extra risks involved.

Andrew Bailey is now a central banker, not a fund or pension scheme manager, his sallies into pension policy are political and unhelpful. Lord knows there is enough politics in pensions right now.