Rachel Reeves has not started well on pensions. Pensioners are angry that most are missing out on winter fuel payments. because of the hike in employers NI.
The OBR are now forecasting that the 2017 AE reforms won’t be enacted till after 2030
Her budget has thrown the wealth management sector into confusion over pensions and inheritance planning. For what may be worthy reasons, she has made herself unpopular, the Mansion House speech tonight has been billed as her chance to set things right.
I don’t get the Treasury briefings on the Mansion House speech but its headlines are on show wherever you go for pension news
Portraying Reeves’ speech with a budget red box suggests she’s delivering the budget part 2 and Reeves clearly thinks that the measures she’s proposing tonight will counteract what has come so far.
There are several proposals leaded to the press , all aimed at relieving consolidation constipation. Our pensions plumber will
- Require the 86 local authority funds to consolidate their investments through the 8 existing pools and force the pools to become asset managers rather than procurement platforms – requiring them all to register with the FCA (at present less than half have this status).
- Set the bar for DC master trusts at £25bn with an aspiration of £50bn in assets under each trust.
- There is a reference to reforming contract based workplace pensions
- Reeves said she would legislate next year to enact “some of the biggest reforms to pensions in a generation”,
It looks as if Pension Oldie, who has campaigning for reform to DB pensions will have to wait till early next year. The DWP’s secretary of State has written to the Work and Pensions Committee to apologise that the response to their call for DB reform due in May has been delayed
Let’s hope that whatever Reeves means by “some of the biggest reforms to pensions in a generation” will mean more than just the unblocking of the consolidation pipes.
Underwhelming
While big is beautiful and scale in pensions management important , none of this is exactly a rabbit out of the hat.
The reforms that matter to pensions are around the creation of pensions , not just pension funds. Angela Rayner may argue that
“This is about harnessing the untapped potential of the pensions belonging to millions of people.”
But in reality the benefits of better investment in LGPS will feed through to the UK economy and lower council tax bills rather than improving member benefits. Master Trusts may in time increase performance but as Corporate Adviser points out, size does not correlate to better short-term performance
The harsh reality is that the reforms flagged so far are going to give consumers no prospect of bigger pensions or (in the short to medium term) bigger pots. For the Mansion House Reforms (2.0) to have any popular impact , the Government needs to show how these reforms lead to better pensions.
We are told that ~Interim Report of the Pensions Investment Review will be published today -to coincide with the Mansion House speech.
It won’t make for good reading for the mass ranks of asset and fund managers whose business models depend on the LGPS. Consolidation will not be exclusive to the buy-side.
Conclusions
The announcements tonight look like no more than fixing consolidation constipation. There is no mention in any of the reports of using the VFM framework to do this. Instead the consultation on DC mastertrusts will focus on mandating that schemes get to scale and if they cannot show a plan to do so, will be required to consolidate. As for single employer schemes. the Government appears to have given up on getting them to give up. It will be interesting what (if any) plans Government has for GPPs (the FT has a glancing reference).
But there is nothing here that suggests that £80bn will flow into the British economy. This is pure speculation and without mandation (which is being ruled out) the best can be expected is that the LGPS pools and larger master trusts will be subject to a higher degree of coercion. I must say, one has to wonder “who from” since neither the Ministry of Housing, Communities & Local Government (MHCLG), or TPR appear particularly expert in encouraging private market investing.
Meanwhile the populist agenda for pensions continues to be ignored. The pensions dashboard s are suffering further neglect and are now down to a single dashboard, there is no progress on key initiatives on “decumulation” of DC funds and the much-touted work on CDC seems to be in a lay-by.
The Mansion House Reforms are now about forcing the square peg of our pension system into the round hole of the Canadian and Australian ones. That is hardly the biggest pension reform of a generation.
There seems to be a presumption that mega funds earn higher returns. Higher rewards for the fund managers perhaps.
Historic criticism of private capital mega funds can be found, for example, at https://archive.nytimes.com/dealbook.nytimes.com/2012/10/01/more-money-than-they-know-what-to-do-with/
More recently, Ludovic Phalippou and others have challenged some of the perceived, accepted wisdom about large funds:
https://www.institutionalinvestor.com/article/2cr4z1fwlg1hjjz0pbpq8/corner-office/how-ludovic-phalippou-became-the-bete-noire-of-private-equity
More generally, my own concerns include
Diseconomies of scale: Larger funds can experience a decline in performance due to illiquidity effects. This is because larger funds must place larger orders in the market, which can move prices against the fund.
Commoditisation: Larger funds are said by some to be less likely to deliver “alpha”.
Mediocrity: Managing too many assets may lead to mediocrity.
Corporate steps designed for scale:
Some firms may focus on making scale easier to manage for themselves, rather than what’s best for their investors.
It may not be a comparable issue, but certainly when choosing investment houses in the past for listed securities, I had a clear preference for firms which closed to new business from time to time.
There’s also an interesting discussion on LinkedIn just now about whether the priority should be consolidation or a funding review with potential to release some LGPS “surplus” to budget-constrained local
authority employers.
https://www.linkedin.com/posts/stevesimkins_pension-megafunds-could-unlock-80-billion-activity-7262619254330478592-lELL
And John Hamilton has posted this comment on the LinkedIn version of this blog:
“Sad to hear RR lauding the Canadian / Australian systems as the best in the world. Ours used to be the envy of the world until the aversion to short term political risk became the driving rationale for our policy decisions.”
“News that the owner of Glasgow and Aberdeen airports is being acquired by one of Canada’s largest pension investors came somewhat out of the blue this week, and naturally raises the question of what this will mean.
“Acquirer AviAlliance, the wholly owned airports platform of the Public Sector Pension Investment Board (PSP Investments), was certainly making all the right noises as it announced its purchase of AGS Airports, which also owns Southampton Airport, from Ferrovial of Spain and Macquarie of Australia.”
Not sure that buying up airports is exactly pandering to an ESG lobby on climate change and carbon footprints.