Twenty years ago, fund managers aspired to pay workplace pensions to staff of large companies, now they are confined to the margins as the investment of our retirement savings has been handed to a few passive managers whose pooled funds can be purchased for a couple of basis points.

This was the context for me reading the Government’s latest consultation on how to get DC pensions serving not just pensioners but the national economic interest. In reality our DC pensions do neither. They do not provide pensions, and they don’t serve the economy.

The Treasury have missed a trick in its consultation. For money to be invested in Britain’s economic interests, it needs to be invested for the long-term. The key word is “duration”.

But DC saving does not turn into pensions, the time horizons of our workplace “pension” schemes are limited to the point at which people start thinking of taking their money, after which most DC schemes stop thinking long-term and start thinking “endgame”. The endgame for a DC trustee or IGC member is the point at which they claim their retirement pot and convert it to cash, annuity or to a wealth management account from which they drawdown money as needed. None of these options are under the control of trustees or even IGCs, they dissipate the long-term opportunity to invest in long-term assets.

Which is why Invesco, save for opportunities in a few DB schemes that aren’t in their own “endgames” is not interested in pensions, why should they be – there is no investable pension scheme for long-term investors withing “DC pensions”.

If you want long-term assets, you need long term liabilities

When I respond to the Government’s consultation, I will do so on behalf of AgeWage and the various interests of Pension Superfund capital. I will make the point that the proper duration of a pension scheme is the average length of its liabilities and for long-term assets to become predominate in DC pensions, the liabilities need to be over the lifetime of members, not just to some notional end-game (typically from age 55).

So the Treasury need to link into one of the streams of the Pension Schemes Bill, that DC pension schemes need to offer by default a retirement income option where the income lasts as long as the pensioner. This does not mean investing in an annuity (another oxymoron). Annuities do not properly invest, they simply match, pension schemes invest for the future using the trustee’s best endeavours. To quote Laasya Shakaran of LCP

In my view (and the view of the authors of moving beyond modern portfolio theory) there are two purposes of investing:

1️⃣ To provide adequate returns to individuals: in the case of pension schemes this is absolutely about paying member benefits

2️⃣ To direct capital to where it is needed in the economy: this is where the discussion around productive, sustainable investment is key

Laasya would like corporate DB and annuities to be brought within the next stage of the review, I slightly disagree with her. Unless we recognise that DC pensions are capable of paying long term income streams that last as long as we do, then we have no hope of them properly embracing the kind of productive assets that the Chancellor is so keen for them to employ.

Pensions are not currently accruing

Other than in a handful of corporate pensions (typically USS) and LGPS, very little funded DB pension is being accrued by “savers”. LGPS has been put within the scope of the Treasury’s review, because it is seen to have a risk budget to invest in long term assets.

But DC schemes- workplace and non-workplace have no such risk budget. They are constrained by

1. liquidity- their assets can be subject to claim either by savers or by bulk transfer (consolidation)
2. duration- the time horizon of most DC schemes investment strategies is “mid-life” not end of life
3. competitive and legal constraints. DC “pensions” cannot be charged to clients at more than the charge cap and are subject to compete against rivals using a VFM system that simply compares the AMC of the default accumulation fund.

DC savings schemes (as we should rightly call them) are not pensions at all. They are the back end of the cow. The front end of the cow, the bit most people engage with, is the bit that pays us a lifetime income. Savers don’t get the front end of the cow, they get shonky investment pathways instead.

The Treasury should address the real problems with workplace DC saving and give us the front and back end of the beast!