I am surprised and pleased that Willis Towers Watson have come out in support of the Mansion House reforms as a pension reset. It has published its various responses in one place and I will digging into some of them in the days to come.
You can read about WTW in its own words here. WTW calls the Mansion House reforms a “golden opportunity”.
What are the Mansion House reforms and what do they set out to do?
The Chancellor set the ball rolling in his speech at Mansion House on 10 July. The DWP then issued a wave of responses to existing consultations, new consultations and calls for evidence, with two key themes:
- Better returns and member outcomes are to be expected if pension schemes invest more in “productive finance” assets
- This would be more likely with fewer, larger schemes – both defined benefit (DB) and defined contribution (DC)
What is guiding Government policy?
The Chancellor laid out three golden rules that he says will guide policy decisions:
- Improve member outcomes
- Maintain resilience of the gilt market
- Strengthen UK competitiveness in financial services
What does WTW want to happen as a result of all this consultation?
Across DB and DC, member outcomes will improve in a regulatory environment that encourages greater investment in growth assets such as equities, corporate bonds, property, private equity and infrastructure.
In turn, being able to remain invested in growth assets over a longer time horizon will make it more viable for DB and DC schemes to invest in productive finance assets.
In DB, policies that lead to more investment in growth assets are those that make the risk/reward trade-off more symmetrical than is currently the case. Our white paper, Six changes to seize the DB surplus opportunity set out six changes that we believe are needed to reduce the current asymmetry. Absent these changes, schemes are incentivised to de-risk beyond what is economically desirable at a macro level for the Government’s productive finance agenda.
In DC, recent Government policies have sought to reduce the number of small schemes, by consolidating them into larger arrangements that can be governed more effectively. Policies should further encourage this trend. Larger DC schemes are typically able to deliver better member outcomes through a wider choice of decumulation options, lower costs, better investment solutions and better member communication and engagement.
The big untapped opportunity in DC is to enable investment in growth assets for longer through CDC decumulation options. Currently, the only income options available are annuities or drawdown and both have drawbacks. Annuities require conservative investment strategies, and most individuals are not well-equipped to make complex decisions on investing and how much to draw down to avoid running out of money. CDC decumulation provides a middle ground that would benefit millions of people already saving in conventional DC plans rather than just the small group that may get access to whole-of-life CDC.
Consolidation in DB would not help with the Government’s growth agenda. A small percentage of DB schemes hold the vast majority of assets. These largest schemes are already very well equipped to invest, either directly or through fiduciary mandates, in sophisticated and/or illiquid growth assets. Their challenge is the asymmetry in the risk/reward trade off, which leads trustees and employers to de-risk excessively (see above).
There is, however, a case for consolidation of small DB schemes, where around 1,800 schemes have fewer than 100 members, which don’t have the scale to improve member outcomes through effective and efficient governance. However, this one-third of private sector DB schemes by number represents just 1% (£15bn) of the £1.5 trillion private sector DB asset base and so their consolidation would be insignificant for the Government’s growth agenda.
The PPF (or any other public consolidator) does not have a role to play where employer support is voluntarily severed. Some proposals are impractical, such as the Tony Blair Institute for Global Change’s suggestion to consolidate 4,500 schemes into the PPF on the basis that this would take 18 years even if onboarding schemes at a rate of one per working day (which is completely infeasible for the PPF). Having a single entity onboarding thousands of schemes on multiple and complex benefits structures has prohibitive operational challenges that is better addressed through commercial consolidation solutions.
In our experience, low allocations in the UK to productive finance assets are not because of deficiencies in trustee knowledge and understanding. The trustee model works well and there is a risk that changes in support of the narrow productive finance agenda could be more damaging than helpful. Furthermore, board effectiveness practices and the ability to engage with high quality advice from a range of specialists are significantly more important in driving good member outcomes than deep subject matter expertise of individual trustees.
They would say that – wouldn’t they!
The view is coherent , it will be contested and there are places where WTW are talking their own book. But Government is adept at identifying self-interest and will look beyond.
WTW are of course more than consultants, they are fiduciary managers, especially in DC where Lifesight is an expression of its best ideas – as an investable master trust. It is therefore beholden on WTW to practice what they preach.
We look forward to seeing practical evidence of its faith in CDC, not just through its consultancy (they advise Royal Mail on whole life CDC) but in its DC fiduciary products.
I am pleased that WTW recognised that there is a point at which “de-risking” is “economically undesirable” for big pension schemes. I would argue that they reached that point some years ago. It is a shame that it has taken the events of 2022 to draw this conclusion. Had we acted earlier, we would have the assets in pension schemes to fulfil the productive finance agenda.
The sad reality is that that asset base was largely lost to meet collateral call on LDI. Board effectiveness and high quality advice need to evidence themselves in decisive action. Trustees must have the courage and advisers must have the conviction that were lacking in the run up to September 2022.
