While the Government explores a voluntary 5% levy on DC funds – in line with Nicholas Lyons recommendations, the insurers have apparently entered into a

voluntary pact by some of the biggest players in the financial services sector to put 5 per cent of investments in defined contribution pension schemes into what Hunt calls “productive assets”

This sounds pretty cozy, and a marriage made in heaven. But there’s a third person in this marriage – the saver – and it’s far from clear whose paying for all this.

Will the cost of this allocation be borne by the saver or the shareholder? Will prices for defaults go up? https://t.co/QqrTujnuVx

— Henry Tapper (@henryhtapper) July 8, 2023

The Bride

The obvious candidate is the saver, who may be required to pay more in fees to get more return. This is in line with value for money principles but assumes that we all agree insurers will be able to find the growth needed to justify a price hike. Savers may find it hard to understand why they are being asked to pay more to take on more risk, they may look for something in return.

The Groom

The less obvious is the shareholders of the insurers, who happen to be the candidates in line for the boardroom bonanza of DB schemes handing over the keys in return for bulk annuities. Don’t rule out a Faustian pack where Government allows them margin in DB in return for them picking up the DC bill. But this is speculation on my part and probably no more than a conspiracy theory.

The Congregation

The third person in the marriage is the tax-payer who incentivises good behavior (and can take those incentives away , if not deserved).

Governments don’t have to mandate change in pensions, they have tax-levers which are more subtle but most effective. As Ros Altmann recently blogged.

The last Chancellor in a Government with a huge majority, who used his first budget to raid pension tax relief, was Gordon Brown in 1997. His infamous removal of dividend tax credits from pension schemes has gone down in the annals of history as one of the major contributors to the demise of Britain’s gold-plated Defined Benefit schemes.

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The Lord Giveth- the Lord taketh away

By 2011, Nigel Williams estimated for Civitas that the raid on dividend tax credits represented

• approximately 4 per cent of the fund since 1997;

• potentially 12 per cent over the course of a whole plan.

Many people who are in DC plans do not realise that the Government changed the rules to make investing in equities less attractive, someone with £100,000 in his/her pot today has probably paid £10,000+ extra tax by not getting dividend tax credits.

If the taxpayer (aka the Treasury and the Chancellor) were serious about getting pension schemes to invest in UK equities, especially private equity, it would reconsider this 1997 tax and grant DC savers the same rights they had prior to 1997. This wouldn’t have to be retrospective, the incentive would be on DC schemes to invest more in productive capital which would not be hampered by Gordon’s windfall tax.

I’m not sure that Jeremy Hunt sees himself in the incentivisation game, but he is better playing that one – than messing with the fiduciary duty by mandating allocations.