The FT are clear that the Government has won a victory over opposition to an aspect of its Pension Schemes Bill
Of course the campaign that Rachel Reeves was helping to launch last week went further than pensions but workplace pensions are the easiest way to get money invested in Britain.
Whether by “workplace pensions” we mean DC. CDC or DB plans, there is much that can be done and yesterday was a good day for DB workplace pensions with the PRA coming down hard on insurers shipping off our pensions to be invested in America via reinsurance treaties mostly written in Bermuda.
I met an old friend who is now at the Bank of England but who I last saw on Lady Lucy eight years ago. She congratulated me for our work in setting up a CDC , reminding me that I was part of a movement to invest more of people’s money in growth (and that we’d be mindful of the Mansion House Accord – we will).
It is not enough to say that workplace pensions are one or other , they are a class of pensions that cover almost all employers in the private sector and a few in the public (LGPS being the best known).
The FT are well known , through Jo Cumbo, for dissent against mandation. I like Jo as I like Ros Altmann and John Hamilton who have all stood out against Government interference in what they see as a fiduciary process. I see trustees having a lot of codes to follow and this is simply an extension. I am glad that the FT have less ferocious opposition though I sense they have some unease. Test for yourself…
Chancellor Rachel Reeves on Tuesday finally won her battle with the House of Lords over legislation that will give ministers the power to force pension funds to invest a minimum amount in UK companies and private assets.
But parliament’s upper chamber agreed to approve the pension schemes bill only after ministers made a series of last-minute concessions that put safeguards around any use of the controversial “mandation” power.
Reeves insisted that ministers be given a “backstop” power to ensure that pension funds comply with a voluntary accord to put billions of pounds of extra investment into the UK economy.
We of course see this Pensions Schemes Bill as the Pension Minister’s but that won’t be the way it’s seen by those outside our bubble. For the FT the capacity of pension schemes to reflate our economy is a Treasury matter and driven by the Chancellor. We have for the first time since Osborne and Webb, a pensions minister who speaks as if he were a Chancellor the two ministers have been as one on this.
There have been concessions as the opposition played ping pong with the Pension Schemes Bill to the final evening of this parliamentary session. Had this agreement (some would say “fudge” not been agree this week, we would not have a bill or an act on pensions. Here are the fudges listed by Alan Livsey and George Parker
Bell said the mandation power would now be “capped, time-limited . . . and subject to a savers’ interest test that has been materially strengthened”.
The contentious power would expire via a so-called sunset clause in 2032, while pension funds would be able to appeal if they felt ministers were telling them to invest in a way that was “likely not to be in the best interests of [scheme] members”,
Bell added. One new concession will require regulators to make an assessment of any ministerial direction to pension funds and that ministers will have to take account of their judgments.
Bell had already issued a clause to prevent ministers from mandating investment in any particular asset class.
In another compromise, pension funds will be able to use investment companies as a way to access their target assets such as infrastructure and private equity.
I must perform ocular gymnastics over the Lords, one eye is cast down in indignation that they used coercion to get unnecessary concessions, in another I raise my eyes to the Upper House for clearing investment companies to be included. I will pick out Sharon Bowles and Ros Altman for the latter and Bryn Davies for keeping us sane in the past few days.
In conclusion, I did not think we needed this row which seems more political than practical. I am not going to stand on principal – especially fiduciary principles .
The argument over mandation will linger; I dare say some of this Government’s opposition will promise to abolish it in their next manifestos; but I doubt it. This really was a storm in a teacup.
I think this is a rather pyrrhic victory for the Government!
As well as the restrictions “fudges” on the powers mentioned above, the Act’s provisions, like the Mansion House accord, relate to Mastertrust pension funds only. They do not apply to pension funds already targeting the pooled risk, long term whole-life liabilities of DB and CDC, where once they are weaned off an over-dependency on bonds they are much more likely to consider UK investment opportunities both mature and immature.
Secondly, the inclusion of investment trusts in the pool of allowable investments, brings the opportunity to invest in more liquid investments targeting specific geographic or technology sectors (e.g. renewables) gives the opportunity to increase UK exposure to pension funds of all sizes. The public accountability of a listed investment reduces the need for the very costly evaluation of the underlying assets, requiring the fund manager not the individual pension fund to pierce the veil of obscurity that cloaks these assets.
Finally the other changes: DB run-on instead of bulk purchase of annuities, salary sacrifice employer NI changes, pooling of small pots, conversion of GPPs to Mastertrusts, and Inheritance Tax on unspent pension assets will inevitably lead to reassessment of their pension promises by employers large and small.
Small employers appear likely to stick with NEST.
Large employers are quite likely to have DB Scheme surpluses which they will seek to retain for the benefit of the Company by using them to fund current pension promises (hopefully and most efficiently through fully open DB accrual at least for lower paid employees).
That leaves a large number of employers who are currently the targets for DC Mastertrusts, but for whom the promise of a 60% improved annual pension outcome for their employees for the same contribution commitment through a multi-employer whole life CDC is likely to be an attractive option.
That to me is likely to leave the current Mastertrust model with a dwindling asset base to invest in accordance with the Mansion House Accord or any mandate that can be justified.