— Josephine Cumbo (@JosephineCumbo) June 22, 2021
Yesterday, I wrote about the immediate impact of the DWP’s regulations on consolidation of occupational DC plans, today I’m looking at the “second wave” of measures that the Government could bring in , to create a pension system more in line with the Australian Super System, where average scheme size is indeed above £5bn.
What are the perceived benefits of going further and faster?
It is interesting , for a Government that enacted a means to provide collective pensions from a defined contribution structure that CDC gets no mention in the new call for evidence.
Indeed, in his ministerial foreword, Guy Opperman mentions just about everything but the paying of pensions in his call for consolidation of larger DC schemes.
We know from other countries such as Australia that scale is the biggest driver in achieving value for money for savers and ultimately better retirement outcomes.
Further consolidation will drive better outcomes for members through better governance and greater investment in illiquid assets.
Larger, better governed schemes are able to develop more innovative investment strategies. There are also fantastic opportunities for schemes to invest in the UK; in innovation, in infrastructure, in clean growth – underpinned by the UK’s net zero ambitions.
Actually, there is little evidence from Australia that the money savers pay for services from large schemes is less than paid in smaller schemes in the UK. This is partly due to employer subsidies in our schemes but mostly due to differences in investment strategies and perhaps slightly less margin pressure on the providers of services.
The call for evidence also suggests that big is not necessarily better in terms of outcomes
While the reviewed international evidence shows that larger funds often have a more diversified investment portfolio, it does not seem to show a clear link between fund size and returns
This seems to go against the mantra that consolidation would lead to better outcomes, but there is more to the measurement of value than returns – making our money matter for a start. Good governance is generally considered to improve returns and the Government would be better to pursue the argument that big governs better than simply rely on “economies of scale”.
The lessons to be learned from the Australian system are societal, Australians are proud of the Super system which effectively bankrolls much of Australian public spending and investment in innovation. Let’s hope that it will also clean up Australia’s act when it comes to “clean growth”.
But the Australian Super System fails to provide pensions , just as the UK DC system fails to provide pensions and since the economic justification for tax-payer spending on pension tax-relief is to reduce the burden on future generations from those lacking income in retirement, there ought to be concern at ministerial level to promote CDC. I suspect that there is an awkwardness within Government about this and there shouldn’t be.
Regardless of the consultation not saying it, limiting schemes to multi-billion pound behemoths will create the conditions where risk-sharing can become the norm and where the default way of “getting your money back” can become a wage for life solution, albeit a wage that can go down as well as up.
The ministerial foreword ends prophetically
It is not my intention to stop at £5 billion but given the present size of the UK market, this is the appropriate cut off- for now
John Ralfe is right to ask just what could be consolidated in the + £5bn space.
Have I missed something? How many £5bn DC funds are there in the UK….?
I can think of 6 , most of which are multi-employer. Even the Lloyds Banking Group Your Tomorrow plan is technically a collection of DC plans within the bank’s complex pension structure. Big is usually complex, because it involves heritage benefits , big tends to be hard unless big happened in a purely DC eco-system.
The barriers for consolidating bigger schemes are that they simply don’t have anywhere to go and even if they could move, moving would involve baggage. But the Government are right to consider raising the floor of “small” and it is a question of where between £100m and £5bn they re-establish it. Ultimately, “super-scale” looks like being £30-40 bn. so there is a long way to go, but super-scale will happen organically and need not be forced
Open to innovative and creative ideas?
The majority of the paper is taken up with rehearsing what has come so far and includes a number of charts based on TPR numbers which reinforce the general thrust but don’t tell us very much about the state of the large DC market in question. We don’t get detailed breakdowns of how many DC schemes have assets above £100m and sadly we don’t get a feel for what the FCA call “employer schemes” within insured GPPs , that collectively break that barrier.
There is a need for better Management Information and I suspect that the FCA/TPR joint paper on value for money should go some way to providing us with a better picture of UK DC this year and in years to come.
The paper also suggests that there may be better ways of measuring value and money than via net performance.
The government will continue to review the asset threshold below which schemes must conduct a comprehensive value for members’ assessment (currently £100 million) and invites views on how a similar but more tailored approach could be applied to schemes above £100 million.
We are open to innovative and creative ideas
Responding to the Government
I will not be holding back. We need to value schemes in terms of member outcomes and not on some abstract formula like net performance which tells members nothing about the value they are getting for their money and allows trustees to continue to think of DC as DB without the pension.
When we make this move (and I think we are getting there), then the question of whether employers should be focusing on running schemes or maximizing contributions becomes obvious.