Jeremy Hunt at the time of the last Autumn Statement

British Chancellor Jeremy Hunt promised last month to use his 2023 Autumn Statement to “unlock productive investment from defined-contribution pension funds and other sources” — so as to create a more diverse financing system to help high-growth companies.

He is not letting the grass grow under his feet calling in leading financiers to number 11 to find ways to deliver on this promise.

This blog looks at the levers at his disposal, from the current benevolent nudge to full on intervention. I start with what’s come so far and then speculate at what we can see in the future.

My conclusion is that any intervention must address not just the fiduciary issues of improving member outcomes but also the issue that competition between providers is currently purely on price.

Stage one – nudging schemes to consolidate

The current tactic is to encourage smaller DC schemes to put their hands up and come quietly to agreements with larger schemes capable of offering a better governed and better invested pot to the saver. This has had limited success and more is being done to accelerate with stronger nudges

Stage two – require failing schemes to pack it in

The VFM consultation is about finding ways to measure success and failure so that successful schemes take on failing schemes. The consultation makes it clear that Government intends to grant itself powers to make this happen, using three threshold tests to measure which schemes are failing (and how)

Stage three- encouraging schemes that can – to provide productive finance to fast-growing British companies

This is the new and as yet unchartered intervention. You can lead a horse to water but you can’t make it drink and many large commercial schemes that are consolidating less viable schemes are resisting interference in their investment strategies , citing their fiduciary obligation to put the member first.

The easiest way to counter that is to argue that investing as the Treasury would have us invest, is in the member’s best interests. But there is scepticism about private markets , surrounding the valuation process, too little liquidity (Woodford), too much liquidity (dry powder) and the short-termism of private equity and venture capital fund managers in churning investments they should be hanging on to.

Most of these are issues of trust and could be surmounted if trustees felt they were operating in a fair market. Government interventions so far , have centred on encouraging a new fund structures (LTAF) and tweaking the charge cap so that exceptional management fees can be accommodated within a 0.75% pa charge

But these interventions are clearly not enough. Nigel Peaple of the PLSA, which represents occupational schemes including master trusts , told the FT

“Trustees are open minded about what we can do collectively to help the UK economy but it is essential that this operates in the interests of savers.”

Which is hardly a ringing endorsement for change. More of a “yes but”. This is pretty well where the Chancellor has got to so far and to push much harder will mean applying some unpopular measures.

Stage four – options for the future

Pension funds and insurers have in the past been subject to restrictions in assets they could invest in. Until 1979 there were restrictions on the investment of pension funds oversea , restrictions that were partially lifted by the abolition of exchange controls though full mobility of capital did not follow for some years.

Some kind of restriction could be reimposed in the Autumn but this looks unlikely, there are other ways to encourage good behaviour and most revolve around strong intervention – compulsion.

Either the Treasury can incentivise good behaviour or disincentives bad.

The trick is to understand what is best incentivised. For a trustee, the primary interest is the interest of the member, so any incentive must justify loading a member with more risk. Creating an improved liquidity pool for illiquid investments or curbing the behaviour of private equity and debt managers could help. Incentivising fiduciaries to align the nation’s interests with those of members could be one way, but it assumes that trustees invest in a vacuum

In reality , it is the executive of the funder of the occupational schemes – the CIO and his/her team, who determine the investment strategy and trustees have the right of veto.

The CIOs have the interests of the management and shareholders of the funder as well as the member outcomes to consider and they are much more likely to be influence by negative sanctions against their bad behavior. Such sanctions tend to be punitive to the management and shareholder and might include taxing providers not complying with investment guidelines or even removing regulatory authorisation.

How will Government escalate?

In the absence of any powerful lobby against, I think it will. In 1979 the Unions were opposed to the abolition of exchange controls on the basis that it would see investment taken from British companies to overseas ones.

There is now an argument to the contrary , that forcing DC pension funds to invest more in the UK and more for growth is not in saver’s interests or in the interests of shareholders who are averse to spending more of their annual management charges on investment.

I suspect that this is the point at which providers of pension schemes are at their weakest and where Government should strike. If providers cannot absorb the added costs of investing in expensive assets in their current charging structures, then the basis of competition mus thcange.

Currently schemes compete on cost , not because they should, but because they have to, the majority of decisions being taken on a perceived saving in an AMC from switching provider. Making such decisions dependent not on price but on value, may mean that providers cannot but afford to spend more of the AMC on investment or push up prices.

I think that by intervening in the process by which employers and trustees select new providers , may be a further option for Government, one that is not so contentious as taxing or de-authorising, but one that will be as effective.

Making a scheme that invests the right way – a ” best buy” has the advantage of encouraging  consolidation and the large schemes to invest into productive capital.