This is a really excellent piece by @helentbiz, not least because it touches on the fact that there do actually have to *be* projects to invest in in the UK + how the DC market (even with consolidation) will take time to mature. https://t.co/NrSRbYIKT1

— Connor MacDonald (@CGG_Mac) February 7, 2023

There’s consent amongst those who can access this article – that it’s a great piece of work. I cannot précis it much better than Connor MacDonald but his tweet should be on my blog because Helen Thomas and Josephine Cumbo’s work at the FT informs on the major dynamic of the debate on Value for DC savers – that we can’t confuse the risks taken by savers turning their pots to pensions – with the risks taken by sponsors in providing pensions for their staff. DB and DC are fundamentally different.

Helen Thomas’ pension market analysis is spot on

Private sector defined benefit schemes, if anything, are going in the opposite direction: they are largely closed, increasingly mature and trying to reduce risk by matching payouts on members’ benefits to fixed-income assets. Regulation is pushing such schemes towards less risk and insurance sector buyouts.

The younger membership in defined contribution schemes, where savers bear the risk for their eventual pension pot, offers the timescale for riskier investments. But the market is fragmented and pots are generally too small. Pushing higher-cost investments, like last week’s move to exempt performance fees from the cap that protects savers, risks eating away at already-insufficient provision.

One of the things we haven’t sorted out with our workplace pensions, is what we want them to do. If we want them to be savings vehicles which are cashed in at retirement then illiquid investments designed to pay off over decades look the wrong route for DC workplace pensions. If however workplace pensions start looking like pension schemes and pay people a wage for life, then the arguments for higher allocations to “riskier – illiquid pensions that pay more over time” , gets stronger.

We are currently in the “in-between” stage of the discussion where people tend to cash out their pots while the Government is looking for ways to extend pension schemes to “whole of life” arrangements (see the CDC consultation).

People who see the VFM framework as a way of opening the door to the economies of scale achieved by Australian Super funds , the large industry funds in the Netherlands and the risk-sharing DB schemes of Canada, miss the obvious point that the Framework does not measure DC other than as a savings vehicle (decumulation is in phase 2, a bit like the extension of our high-speed rail network.

And this is to Helen Thomas’ point that investment in infrastructure is political and where so much of the pension system, including the Government’s own master trust NEST is in one way or another, sponsored by Government, the choice of investments becomes a political matter.

Where direct investment into illiquids is making most progress with pensions, is with those few funded DB pension schemes which are not planning to close within the next ten years, the council tax backed Local Government Pension Schemes. At a recent DC pensions conference , Hymans Robertson showed us the enthusiasm at one such scheme for illiquid investments, base on the success of their long term strategy and it is clear that DC savers have much to gain from investing in this kind of patient capital.

This example of a local government pension fund (GLIL) is headline news, but in reality less than 1% of UK’s funded pensions are invested this way.

But we should be wary- as Hymans pointed out, of translating this enthusiasm into immature workplace pensions too soon.

This morning I’ve written about how Australia is – as a more mature DC system – having a more urgent debate about whether the pension consumer is subsidising social housing to the detriment of their pensions.

The debate about the political purpose of the VFM framework is confused by a suspicion that “consolidation” is as much about speeding up the inclusion of illiquids as it is about the improvement of outcomes.

Yesterday’s Pension PlayPen debate in which TPR, FCA and DWP were all involved touched on this conflict, the VFM framework consultation is understandably stressing that economies of scale will lead to improved outcomes but is does not “bang on” about the need for illiquids. I suspect that balancing the need to be on the saver’s side while maintaining the support of the Treasury, is a fine line for the DWP to tread.

We are moving forward with our DC pension system but we need to do so together. There are different agenda at work and Helen Thomas’ excellent article explains how they are playing out. Right now , it is clear we need to be patient about patient capital.