They say that the devil is in the detail and here is the detail behind the Mansion House reforms (pr 2). The Pensions Investment Review Interim Report  is divided into four sections, dealing first with DC workplace pensions, then with LGPS, then with value for our money and finally with the investment reforms that are at the heart of the Mansion House agreements.

1. DC workplace pensions.

It is most curious that despite occupational DC schemes being regulated by the Pensions Regulator, I could find no mention of it in this or other sections.

The idea of a multi-employer scheme written as a GPP (a series of personal pensions) has been in the FCA’s lexicon for some time. It would seem that the Government is looking to treat GPPs and multi employer DC schemes (master trusts to you and me) as equivalent and to drive consolidation not just through scheme mergers but by creating as far as possible, single defaults carrying the vast bulk of money in the scheme.

Scale and consolidation among the larger schemes can therefore
drive additional benefits. To help achieve this, we are seeking views on two
proposals for multi-employer schemes – to introduce minimum size
requirements for default funds and to place limits on the number of default
funds

For GPPs, default proliferation happened because advisers thought they knew better and tried to get scheme specific defaults they could advise on. When advisers could no longer charge members through the AMC for this service (consultancy charging) they withdrew- on the basis that most employers wouldn’t pick up the bill. Nowadays most of these defaults are orphaned of advice, something that IGCs pick up on but are powerless to do much about. Consolidating defaults in GPPs is a good thing, it means that money is concentrated in one place, bringing down costs and improving investment capacity.

For master trusts, default proliferation is a matter of commercial necessity. While the non-advised MTs have single defaults, those competing for advisory favor have low and high cost defaults to appeal to different c0nsultants , to get on short lists and ultimately to win business in a price-driven market. Multiple defaults for MTs is a marketing trick and should be discouraged. If value is to win out over price, MTs are going to have to give up bargain basement default strategies.

But heh- we have five years before any of this bites…

We propose that such a requirement would not apply before 2030
at the earliest. The minimum size and maximum default numbers will be set
following consultation, at a level at which these efficiencies, economies, and
investment benefits are realised and that addresses the current
fragmentation within the pensions system.

Perhaps of more immediate moment, the Government is looking to drain the moat that protects GPPs from predation

we are proposing to legislate to allow contractual overrides without individual consent for contract-based pensions, with appropriate protections that would be set out in FCA rules

This will be of concern to insurers , especially insurers who have no master trusts but many GPPs (Royal London especially). The capacity to remove GPPs to occupational schemes could be a major source of business for consultancies – especially if insurers continue to favor investment in MTs over GPPs. I can see this becoming a cause celebre for workplace pensions and is perhaps the one major innovation in the paper.

2. LGPS

I won’t dwell on LGPS as I have written on this subject elsewhere on this blog. It is important to note that the proposal is not to close the 86 LGPS funds but to require them to use FCA regulated pooled funds not as procurement houses but as providers of presumably  segregated mandates to meet their particular circumstances

we are consulting on a series of measures which will require all LGPS funds to delegate the management of all their assets to their asset pool, alongside requiring that pools conform to a rigorous and universal set of standards. This model is informed by
international best practice

Delegation of the management of all assets to the pools means shutting out the funds industry and reducing the role of investment consultants as the pools take on advisory functions.

These measures would formalise standards for delegation, with the
asset pools taking responsibility for all areas of investment implementation,
whilst funds focus their attention on setting the overarching investment
strategy, taking into account their membership and funding requirements.
Pools would be required to develop the capability to provide their partner
funds with investment advice to support their strategic decisions.

3, Beyond the VFM Framework

Clearly the VFM framework isn’t being scrapped but it is now in need of support. To wit- another consultation which accompanies this paper which I will come to over the weekend

The accompanying consultation document ‘Unlocking the UK
pensions market for growth’ is seeking further evidence on measures that
could seek to address this and support interventions like the VFM
Framework. We will ensure that any changes we make are reflected in the
design of the upcoming VFM Framework. We want to create space for
innovation and ensure all measures build on and complement each other.

This is going to be fraught, not least as it puts many employers in a difficult position with regards workplace pensions written as GPPs.  Back in 2013 when we started the Pension PlayPen workplace pension comparison advice, we warned employers that the decisions they mad then might come back to bite them in years to come. This prophecy seems to be coming true, they will need to be accountable for their workplace pensions and the value they are giving staff.

One proposal that was suggested by respondents to the Call for
Evidence was to place a requirement such as a duty on employers to
consider value, at scheme selection decisions or at regular intervals.

Financial advisers also seem to be being dragged in to support the VFM framework. They appear to be considered the villains of the piece (with regards to the race to the bottom on price)

At present, here is no specific regulatory regime regulating
pension scheme selection advice or investment consultancy. There were
some suggestions in the Call for Evidence to bring advisers into FCA
regulation. Some respondents noted that this form of regulation would
mean that advisers are required to consider the value of schemes or
investment strategies in their advice, which could address the excessive
focus on cost.

But of course most advisers stay well clear of workplace pensions as they do not have the means to get paid for advising and often don’t have the skillset. The only way that Government could make the selection of workplace pensions advised, is to mandate employers take advice as occupational trustees need to.

Therefore, the government wants to understand exactly to what
end and how new regulation would play a role in ensuring that advice
consistently considers returns alongside costs to ensure that the best
interests of pensions savers are being served.

This is not really the point. The point is that employers will not act without advice but won’t pay for it. Advisers aren’t going to have confidence in the VFM Framework in its current state. It is just too hard to use and explain.

4. Investments

For now , Rachel Reeves threat of direct intervention in the investment of monies is in abeyance. Clearly it is still concerned.

The government is concerned by the evidence that UK
pension funds are investing significantly less in the domestic economy than
overseas counterparts.

For example, DWP analysis has found that there is a 30-percentage
point gap in the amount of home investment across asset classes in UK DC
funds compared to Australia. And there is clear evidence of a sustained
pattern of withdrawal by DC and LGPS pension schemes from UK listed
equities for at least the last decade.

The snake has been scotch’d not killed.

The Review will therefore use its next stage to consider whether
further interventions may be needed by the government to ensure that
these reforms, and the significant predicted growth in DC and LGPS fund
assets over the coming years, are benefiting UK growth.