UK defined benefit (DB) schemes need an incentive to run on and fund the government’s productive finance agenda, panellists said speaking at an event this week organised by AXA Investment Managers on options for DB schemes.
Panellists highlighted that currently there is no incentive for schemes to run on and invest in a “load of risky assets”.
Back in July the UK’s chancellor of the exchequer, Jeremy Hunt, announced plans to unlock up to £75bn of additional investment from pension schemes to help grow the UK economy and deliver benefits to savers. This would include encouraging schemes to run on and invest more of their assets in productive finance.
However, according to Payam Kazemian, client director at Zedra Governance, at the moment there is a lot of talk about return, but not much about managing the risks that come with that investment.
He said: “The government is talking about pension schemes investing in UK productive assets, but this is mainly an employer-driven decision.”
He explained that from an employer’s point of view if a scheme is fully funded or very well funded, the employer is effectively taking a risk if its scheme doesn’t make it and the employer will have to pay for the deficit.
He added that the current framework is not “really incentivising anyone” to take that risk.
“There needs to be some structure or incentive, whether it’s through a tax incentive or structure set up where the government can potentially give some kind of guarantees to strengthen the covenants of the schemes,” he said.
This, Kazemian said, would protect the scheme from having to pay for the deficit resulting from this kind of investment. He added that government guarantees could make employers and trustees see that in the longer term, they are safer to run on and help the government agenda.
He added: “But as it stands now, trustees don’t have the incentive.”
James Brundrett, senior investment consultant at Mercer, added that schemes now find themselves with a “golden opportunity” to seek insurance transactions but the Mansion House reforms are shining a light on alternatives.
“There’re a lot of options on the table” for sponsors, according to Brundrett.
He agreed with Kazemian that tax incentives are some of the “good ideas” out there in the market to encourage schemes to run on but he said it’s ultimately about putting members’ interests first.
Maria Johannessen, head of UK investment at Aon, admitted it’s difficult right now to see what the incentives are, but she said that with a “little bit of imagination” there clearly are some incentives for trustees to run their schemes on.
She said: “The option to pay discretionary pension benefits is clearly there. From an employer’s perspective, return of surplus, potentially funding benefits – It’s all out there. [While] it’s not as structured as an insurance transaction, the options are there.”
Like the other panellists, Johannessen said that these could be enhanced with tax benefits and potentially simplified legislation.
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