Plans to force defined contribution (DC) schemes to publicly disclose their level of investment in the UK and improve the performance of poorly performing schemes could risk having “unintended consequences” – causing plans to become more risk averse and potentially “compromising” trustee fiduciary duties.

On Saturday (2 March), chancellor Jeremy Hunt announced proposals to require DC funds to disclose their levels of investment in British businesses, as well as their costs and net investment returns.

He said they would also need to publicly compare their performance data against competitor schemes, including at least two schemes managing at least £10bn in assets – and noted poorly performing schemes would be barred from taking on new business from employers.

Lane Clark & Peacock (LCP) said, while the proposals are well-intentioned, they risk having unintended consequences or being limited in their effect.

Partner Steve Webb said: “The threat of effectively shutting down pension schemes whose investment returns are relatively poor runs the risk of causing the whole industry to become very risk averse.

“Sometimes it is necessary to take investment risk to achieve the best returns but those risks don’t always come good. The penalty for being an outlier will be so great that this new approach could rein in the top performers as well as challenging the under-performers.”

LCP partner and head of DC Laura Myers also had concerns about the proposals to force schemes to disclose how far they invest in the UK.

She said: “Simply requiring pension schemes to list their investments in the UK will have little practical effect. There are big issues about what counts as domestic investment and just having to report something will not in itself change behaviours. Trustees will be looking for the best returns wherever they can get them, and publishing statistics on UK investments will not change that.”

Fiduciary concerns

PMI President Robert Wakefield also expressed concern over the chancellor’s initiative on investment disclosure – adding it could “compromise” the control that trustee boards currently exercise over their investment decisions.

He said: “It is possible that these reforms will adversely affect trustees’ fiduciary responsibilities. Currently, trustees’ policy concerning the selection of investments is set out in their statement of investment principles, and trustees are required to explain their rationale for choosing specific asset classes.

“Creating pressure on trustees to invest in UK equities to a greater extent than is the case currently would compromise their autonomy.”

Wakefield said he was also “perplexed” by the proposed sanctions for underperforming DC schemes.

He said: “The authorisation regime for master trusts already empowers The Pensions Regulator to force poorly performing master trusts to merge, so these new changes would only apply to single-employer trusts. It is also unclear how contract-based schemes would be affected.”

Investment case concerns

Hymans Robertson Head of DC Investment Alison Leslie said the Financial Conduct Authority (FCA) could also be concerned the chancellor’s initiative to disclose investment within the UK may lead to an expectation that more should be invested in UK assets where potentially the investment case for doing so doesn’t stack up.

Leslie said: “There is a friction here potentially between the ambitions of Mansion House and the FCA’s duty to make sure initiatives protect members and the market framework.

“Return drivers are the key consideration of asset allocation decisions alongside diversification and risk management. If the investment case stacks up recommendations will be made to invest in the UK. Many argue however that the case for significant investment in the UK does not currently exist.”

Despite this, Leslie said the announcement on benchmarking against other schemes was not unexpected, particularly against the largest >£10bn plus in assets.

She said: “This will drive consolidation in the market. However, consideration still needs to be given to those schemes where, due to structure, it is and has been difficult if not impossible to move, for example those with GMP underpins. A solution to that has not yet presented itself and this remains a big problem.”

Encouraging transparency

Standard Life retirement savings director Mike Ambery said the direction of travel for DC schemes was now clear with the government looking to encourage greater transparency around performance and where money is invested.

He said: “2027 for proposed pension fund reforms is not a long time away and will send a tremor to those running pension funds that are poorly performing. Roll on another three years to 2030 and that is the target for Mansion House and significant private and public sector commitment to unlisted equities.

“Both of these initiatives are likely to encourage consolidation and a move towards fewer, larger schemes. Even the largest own trust (employer) pension schemes will now be caught by this move.”

But while Ambery said he welcomed this focus on performance and transparency around investments, he called for any new framework to focus on performance in the round.

He said: “Investment performance is a key consideration but attention also needs to be paid to other factors we know are important to customers like the quality of digital services and service indicators like net promoter scores.

“We also can’t lose focus on the biggest single factor impacting people’s retirement outcomes – the relatively low levels of contributions they are making and what is currently required under automatic enrolment.”

Ambery also said the focus of these reforms would initially be on employers, not individual members.

He explained: “At the outset the focus of these initiatives will be on communicating performance to employers rather than customers. Over time customers might get notice of the poor performance and be told how this will be fixed for them. This is very much the case in other countries such as Australia. Options might include moving pension savings to those that are better performing. We will need to be careful on ensuring trust in savings and how we communicate to the customer.”

Disproportionate disclosure

The Society of Pension Professionals (SPP) added it was not clear what savers or employers would be expected to do with the information about the level of investment in the UK. It also said there were practical issues in such disclosures also.

SPP DC committee chair Giannis Waymouth explained: “The reporting burden as described appears to be disproportionate. This is because many DC pots are invested in unit funds – where the underlying investments may be changing rapidly.

Practically, the most you could do is report on what proportion the investment manager is targeting for a fund. The actual proportion held in UK equities for a particular member’s pot will vary by member as they get older and different investment drivers come into play.”

Waymouth added: “Government must be careful that a new reporting obligation like this doesn’t have the unintended consequence of driving away investment from the UK due to the costs and complexity involved.”

Developing teeth

People’s Partnership, the provider of The People’s Pension, said it had not been surprised over the announcement.

Director of policy Phil Brown said: “It was only a matter of time before the proposed Value for Money framework developed teeth.

“This could be very challenging for some, but the government has long signalled its intention to consolidate the workplace pensions market and drive better value for savers. We think that the value for money framework should be extended to retail pensions now. Without transparency and comparability, most people face a choice they aren’t prepared for, unless they are paying for financial advice.”

 

 

 

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