A proposal to Treasury to improve DC defaults (and saver outcomes)

The big issue for the PLSA conference and indeed the PLSA is how it should respond to the Government’s call to celebrate risk and reintroduce it into the pension schemes within its scope.

There have been calls for the mandation of a 5% “demi-tithe” on the default funds operated by the remaining workplace DC funds, with the tithed allocation being reinvested in UK growth funds such as those proposed by Sir Nicholas Lyons, the Tony Blair Institute and endorsed by senior politicians

The Prime Minister in this photo , seems rather more interested in Lyons’ ideas, than the PLSA conference so far.

The Conference seems to have got the message that DB schemes aren’t going to invest in illiquids for fear they will need to be sold at a knock-down price at buy-out.

DC schemes are pleading poverty of aspiration as the revenues they are collecting from their “squeezed AMCs” make the cost of including private market assets in portfolios prohibitive ( to their competing for mandates).

The PLSA. in its call for Government interventions – notes that “employee benefit consultants” are responsible for this, though intelligence I have suggests that it is employer procurement teams who have cottoned on to the headline AMC as the one measure they can influence to improve outcomes.

Short of providing better measures (which I think the Government is considering through the VFM consultation), mandation is – so far- the only game in town.

Proposals to HMT to encourage the use of Growth Funds in pensions.

Forcing DC schemes to invest in UK Growth is unlikely to be high on a Conservative agenda (though Labour’s Rachel Reeves has said she “would not rule it out”.

A more feasible option would be to restructure tax privileges for pension schemes so they were focussed on those which embraced UK growth at least to a minimum level.

This could be done through the taxation of gains on scheme assets ( for instance restricting CGT exemptions for non compliant schemes) or on contributions (for instance restricting corporation tax-relief to employers choosing workplace pensions that did not carry the requisite weighting UK Growth,

The appeal of this incentivisation is that it would reshape the market , without the risk that a Conservative Government was considered meddling. Employers could continue to promote schemes with ultra-low AMCs but would have to explain why they chose schemes with lower growth or less relief on contributions.

Creating an investment culture

The concept of “risk mitigation” is at odds with the embracing  and celebration  of risk advocated by Treasury Minister Andrew Griffiths in kicking off this year’s PLSA investment conference.

While the majority of delegates, including the Pensions Regulator continue to advocate LDI, DC lifestyling, CDI and “end-game” investment strategies, savers and pensioners are being denied access to the areas of UK economic growth for want of appeal to the employers who sponsor plans.

Whether DC or DB, workplace pension plans are being sold to employers as presenting low-risk. If the Government is serious about wanting such plans to take on rather than avoid risk, it will need to do more than deliver short videos to be streamed at Conferences, it may have to adjust the tax incentives it offers so that they reward risk taking rather than risk reduction.

After all, giving employers access to Government debt at the 25% discount afforded by corporation tax relief is not an inventive aligned to stated policy but a giveaway that simply recycles the existing problem.

We know that the Treasury are currently exploring a number of ways to generate UK growth through pension fund investment. Of all the ideas I have heard and read about so far, restructuring tax reliefs to “celebrate” the adoption of risk, looks the best so far.

Creating a VFM framework which measured value in terms of better outcomes is a longer-term project. Adjusting the pension taxation structure could see changes in behavior in months rather than decades.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to A proposal to Treasury to improve DC defaults (and saver outcomes)

  1. jnamdoc says:

    Pension schemes get to operate in a tax privileged environment. Employer and employee contributions attract tax relief, and rightly so, they are an expense.

    The Schemes are allowed to earn incomes and gains on a tax free basis from their investments, recognising investing is a risking businesses.

    That is how tax reliefs work – if the Fiscal desire is to encourage something, provide a tax incentive. Investment is a difficult business. And its critical for GDP and growth, so the pension tax regime rightly encourages it. It schemes are not investing, not taking measured risks (for the tax reliefs), do they deserve the tax reliefs everyone else is paying for?

    Its a more nuanced equation in a global open economy (say). In fact the whole model begs re-assessment. Why should UK Govt (and tax payer) give up front tax relief for schemes that do not invest, or if they do invest, for most of that investment to be out with the UK? Other regimes such as the US can align the tax relief to a requirement for a threshold or gateway level of investment in desired areas.

    It seems to me that investment in the future, in growth areas and in the decarbonisation, infrastructure and new technologies are and will be critical growth areas for UKPlc., and anything that can encourage that is surely worthy of debate?

    The investment experts get it and they will design the products. How can we help Trustees too?

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