Consultancy WTW has recommended six pension policy changes to help fuel UK economic growth. This comes ahead of Jeremy Hunt, the chancellor of the exchequer, giving his Mansion House speech later this month, which is expected to outline proposals for getting more UK pension savings invested in productive assets.

In its report, WTW argues that, where defined benefit (DB) assets are concerned, this will only be achieved if some schemes adopt different objectives; schemes would invest differently if fewer were looking to transfer their liabilities to an insurer as soon as possible and if more were instead seeking to generate surpluses.

WTW said it should therefore be made easier for schemes to use surpluses to benefit pensioners, sponsoring employers and current employees, so that they see value in pursuing higher investment returns.

This would also allow surpluses that have emerged already to be utilised sooner, it said.

Rash Bhabra, head of WTW’s UK retirement business, told IPE: “DB pension funds have been seeing significant improvements to their funding positions during 2022, even before the liability-driven investment (LDI) crisis, and then the LDI crisis just meant even more improvements to their funding positions.

“The effect of that has been that funding positions has improved and pension schemes have generally de-risked to try and lock into these positions.”

He added: “The question really has been the extent to which, with £1.5trn of assets in the DB fund, was the best use of capital at a time when the economy is crying out for a boost.”

Bhabra said that as a result of the improvement in DB schemes’ funding positions and looking at it from an “opportunity perspective for employers, employees, DB members and the economy as a whole to benefit” WTW spent the last 18 months talking with the industry before putting out its six recommendations.

“We thought with the chancellor’s upcoming Mansion House report, and with the government being very intent on looking at everything or anything that could be done to help promote growth, and pension funds seen as potentially part of the solution, now’s the time to [publish the report],” he said.

The recommendations in the report include action to:

  • provide a straightforward legal route by which DB surpluses can finance contributions to a defined contribution (DC) scheme used by the same employer;
  • make one-off lump sums paid to DB pensioners – ‘authorised payments’ – like lump sums from DC schemes;
  • change draft funding and investment strategy regulations – these threaten to funnel schemes into excessive de-risking;
  • reduce the 35% tax rate on refunds of surpluses to an employer – this would ideally match the main rate of corporation tax;
  • amend legislation to more readily allow refunds of surplus when a scheme is not winding up;
  • revisit The Pensions Regulator’s statutory objectives.

Bhabra said that the recommendations are “really trying to create incentives or different behaviours” from trustees and employers which lead to “potential beneficial effects” for members and for the economy. 

ABI calls on industry to put savers at the heart of plans to boost pension investment

Efforts to attract further investment in the UK economy must be part of a long-term strategy with savers as a priority, according to the Association of British Insurers (ABI).

In its latest report, ABI called on the UK government to put savers’ interests first and set out how it can enable and encourage more investment in the UK.

It said actions should include:

  • learning from and building on the Long-Term Investment for Technology and Science (LIFTS) initiative to encourage further investment in the UK;
  • ensuring regulation makes it as easy as possible to invest in illiquid assets, including through Long-Term Asset Funds (LTAFs);
  • transforming the culture in the DC market from focusing on keeping charges as low as possible to prioritising value for money.

ABI added that it is possible for pension schemes to both invest more in the UK and continue to deliver the best outcomes for savers, but savers’ interests must come first.

If the government wants to further boost UK investment, and people’s savings, it should focus on making the UK a more attractive market and create incentives for pension schemes, ABI said.

It added that initiatives that pool both government and pension scheme funds, such as LIFTS, have the potential to encourage greater investment in illiquid assets. By developing further initiatives that use co-investment as an incentive, the government could create opportunities for pension funds to put more money behind assets that align with its wider policy objectives.

For any investments that are expensive and/or riskier, such incentives would shift the balance of risk and reward, improving the value for savers, and making them more attractive to schemes, ABI explained.

As LTAFs are only just beginning to emerge, ABI said the government should focus on reviewing how LTAFs work and ensuring regulation makes it “as easy as possible” to put money into illiquid assets.

It added that LTAFs have “specific uses and restrictions in DC pensions, and they avoid the Financial Conduct Authority’s (FCA) limits on what firms can invest in, known as permitted links”.

To empower DC schemes to invest more in alternative assets, such as private equity and venture capital, the associaiton said the industry must end the current “cost is king” culture in the DC market.

As it stands, there is a stronger focus on charges rather than on the value a scheme provides for its members, limiting the assets that providers can invest in, the association said.

“It is encouraging that regulators and government are already shifting focus away from solely being about cost, for example through the recent consultation on a value for money framework.”

ABI added that TPR should also review and update its DC investment governance guidance to “encourage trustees to focus on overall value”.

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