Structural changes such as asset and liability pooling in the private sector, more action against underperforming schemes and greater regulatory flexibility must be among the mix of possible measures that need to be considered to address the challenges facing UK pension schemes today, said Joanne Segars, chief executive of the country’s industry association.
Opening the second day of the Pensions and Lifetime Savings Association (PLSA) investment conference, Segars set out four main areas where change was needed to ensure that – against a challenging backdrop of low interest rates, volatile markets and longer life expectancy, and a £320bn-plus section 179 deficit – the UK’s funded pension schemes can continue to provide for their 16m members.
The PLSA, for its part, has just launched a defined benefit (DB) taskforce to tackle these questions.
Segars stressed the need for action “now” from government and regulators but also said the industry itself could take steps to make a difference.
With respect to the latter, there is a need for some “honest conversations” about the efficiency of schemes despite improved trusteeship in recent years, said Segars, who asked whether there was a case for more action against schemes that fail to live up to the mark.
Structural changes to schemes themselves may also have a part to play, she said, asking whether something like the pooling underway in the local government pension scheme (LGPS) sector could be replicated in the private sector in a bid to reap investment efficiencies.
“Can we go further and think about what that might look like on the liability side of the equation?” she added.
Regulation, meanwhile, needs to be more flexible and mature to help schemes be more efficient and sustainable, according to Segars.
More specifically, valuation periods longer than triennial are needed, she said.
As to “thinking the unthinkable”, she asked whether liabilities could be rebalanced.
She argued that some risk aversion came from regulation that made schemes more risk averse than they might like to be.
Separately, she welcomed the FCA’s market study of the asset management industry as a contribution to making markets “work better”.
The study “asks important questions about the value chain”, said Segars, questioning some of the pricing disparity in the asset management industry that can be seen if you “scratch beneath the surface”.
For example, almost identical global equity mandates can be bought for 45-90 basis points, while the difference is even starker in active real estate, she said.
The Financial Conduct Authority’s study and whether the asset management industry is serving pension funds and other end investors has been a big theme of the PLSA conference, surfacing as a topic during speeches and panel discussions.
On the topic of cost, UK pension funds were recently urged to look towards the cost-reporting framework established in the Netherlands, with an industry kite-mark proposed.