I was kindly invited to speak about DC reform at the Association of Consulting Actuaries annual conference last week in Manchester. As I was putting my slides together I came across an interesting point which was that three recent DC policy reform strands overlap with each other in scheme investment in UK businesses and infrastructure. I’ll show you:
This chart doesn’t include the “support” strand, e.g., investment pathways and upcoming targeted support/requirement for schemes to offer default retirement income products. I haven’t found the connection between this strand and investment in UK PLC just yet (but who knows what the future will bring?).
Let’s start with Value for Money which is intended to require schemes to consider factors beyond costs, including returns, communications and efficiency. We are now in the final stages of developing the VFM framework. This piece of work (controversial for fears of schemes burden and market impacts) has undergone a subtle discourse shift, and now investing in the UK is being emphasised as a way of boosting VFM for members and part of the overall VFM agenda:
That’s why we want to make sure [members] hard-earned money works harder for them so we ensure they receive the pensions they have earned, whilst unlocking growth across our economy. – Angela Rayner, July 2024
Of course, investment is already a key element of the Government’s DC reform agenda. For several years now both Government and industry have been working on how we help DC workplace schemes move away from priortitising costs only – investing in relatively cheap, daily traded and valued asset – to considering returns and volatility management over time and using alternatives and private market assets. This is a large undertaking involving regulatory reform, product development, investment platform restructures and addressing the culture of the market; and its going unsurprisingly quite slowly… So now we have added to this drive for more sophisticated investment an additional strand, that of investing in UK productive assets – a key element of the last few Mansion House statements. Does the need to invest in the UK interfere with a drive to prioritise VFM?
Consolidation, the third strand of the three in question, has been with us for a while and also intersects with VFM. It’s fairly self evident that scheme consolidation leads to cost savings via sharing administration and investment costs among a larger number of members. Consolidation is also intended to improve governance (supported by regulator moves to increase scrutiny of and qualifications among trustees). Recently, however, a further raft of consolidation reforms were announced, including DC default fund and scheme consolidation & Local Government Pension Scheme fund consolidation. So the consolidation focus has shifted as well to:
| Consolidation = larger investment pools = more opportunities for investment in the UK |
So what’s going on here? Has pension reform been hijacked to support a Government agenda or is UK investment a fundamental part of improving member outcomes? I will let you answer that yourselves, but I will include a comment that was made during a superb presentation at the conference (name withheld due to Chatham House rule). This speaker said that the Government believes that if demand is created, supply will take care of itself. How true is this? And what do we need to do to ensure that investing in the UK really does bring added value to scheme members?
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