Let’s focus on the last two paragraphs of this short statement by the Treasury Minister charged with making for more productive regulation.
The disclosures made by DC pension funds are already extensive, but they are little used. Decisions by employers and employees continue to be unsophisticated , comparing products with different outcomes simply on price. Little has improved since the OFT made this statement in 2014
Back then, we thought the answer was to focus on fees
Fees were the only unwanted risks that employers could take off the table and for ten years they’ve been finding ways to reduce fees at all costs. They can hardly be blamed for that.
But now we discover that pension funds need to invest for growth and that means getting more out of investments. So the measure must change, from measuring cost to measuring performance net of costs.
The proxy for performance is (to listen to Bim) asset allocation. Higher allocations to equities equate to better long-term performance , equates to better saver outcomes.
Investing in the UK?
Racheal Maskell’s question was how would the Chancellor incentivise pension funds to invest in the UK.
Bim Afolami’s answer was that DC and Local Government Pension Funds should disclose publicly their levels of international and UK equities.
I would have two follow up questions
- Has the Government given up on DB pension schemes – other than LGPS?
- Why the widened disclosure (international as well as UK equities)?
It does not take much of a nudge to get the UK corporate DB sector to choose to invest for its pension payments, rather than chucking assets over the fence for the insurers to swap equities for debt. What is the Chancellor of the Exchequer doing to encourage DB schemes to invest for the future?
What are the new DC disclosures (which are already made through trustee , IGC and GAA statements, going to achieve? Are we looking to choose DC funds and praise LGPS funds for their overall allocation to growth assets? Or is the split of equities (international v local) designed to shame trustees who ship money overseas?
All of these questions lead to one overwhelming answer. We should be doing everything we can to encourage investment in the UK today. Reporting is a part of it, but only a part.
Joining up the dots..
If the Government has quite given up on corporate DB pensions, then why is the Pension Regulator still banging on about DB consolidators (superfunds), improving opportunities for schemes to run on (Capital Backed Journey Plans) and why is there a consultation on improving DB options – focussing on turning DB schemes from liabilities to assets?
If the Government is focussing on improving value for money for DC savers (and council tax payers) , why is it not focussing on making investment into UK growth assets more attractive – rather than forcing a square peg into a round hole. One look at the performance of FTSE indices v global indices suggests that the listed markets would have failed the DC investor (and LGPS schemes) since the start of this millennium. Where UK growth has been strongest, in the private markets – fuelled by private equity, there is no incentive to invest. The UK investment trust market is currently languishing awaiting changes to regulations to allow DC and LGPS to see fair value from investing in them.
It seems to me that the quality of reporting imposed on Investment Companies is very poor and is resulting in poor outcomes ( a large part of the FTSE 250 being currently virtually uninvestable). Wouldn’t it be easier to fix this problem now, rather than relying on deeply ambiguous VFM measure in some year’s time?
When I compare the quality of TCFD reporting to the investment reporting from the DC schemes I am in, I see further flaws. I don’t see why TCFD reporting should not be part of VFM reporting since the outcomes of the investments made on my behalf are part of the value proposition I am paying for. Similarly, if all I am investing in is a “me too” lifestyle strategy that has little ambition but to keep fees down, then why go to all the bother of TCFD?
I support the improvement of disclosures envisaged by the VFM framework but only if they are focussed on those who choose which pension to participate in (the employer) and those who are currently locked into employer choices (the saver). Right now, neither the employer or the saver is getting the quality of information necessary for them to make informed choices, which is one of the reasons why levels of engagement are so low.
Getting pension investment into the UK
I write on a morning when the Government is being called upon to find £60bn of new money to fund an upgrade to our electricity supply chain
The upside of getting this right is huge, the downside of failure enormous. Here is an opportunity for UK pension funds (of all types) to invest in a project that could lead to a just transition from one form of energy generation to another.
This is the kind of investment in the UK , we need our pension funds to make. It is the job of Bim and his Treasury team to make sure that those who have the capital, invest it and those who have the technology – make it investable.
Renewing the UK’s energy grid https://t.co/EFvt8sccpN
— Henry Tapper (@henryhtapper) March 19, 2024
