Backing the UK
One of the objectives of the Pension Review is to encourage more domestic pension investment in the UK.
Use carrots rather than sticks to help trustees and independent governance committees overcome conflicting needs of members and the nation.
Attendees at the recent Society of Pension Consultants’ annual conference backed incentives (tax relief) with almost three-quarters (74 per cent) needing that carrot for domestic investment while 8 per cent backed compulsion.
One idea gaining traction to encourage local investment is to create a new fiduciary duty for pension trustees along the lines of ESG and the Financial Conduct Authority's consumer duty, not to take investment growth in isolation but to consider other factors such as UK growth – this could be backed by a ‘back stop’ or a ‘safe harbour’ to cut risk.
Another priority for the review is value for money. Thankfully investment charges for workplace DC schemes have fallen. These now average 30 basis points (bps), down from 37bps in 2020. The lowest charges are enjoyed by master trusts (26bps) and large employer schemes (28-30bps), according to WTW.
Many retail pension savers such as the self-employed face charges around 1 per cent for equity funds, three or four times as much – it is just not a level playing field. Could the government mandate change here?
But focusing too heavily on achieving the lowest possible charges can also restrict investment options such as private equity and other illiquid assets and returns for savers.
Is big always best?
On the retail front, the proliferation of pension pots continues with the average person possibly having four or five pots by the time he or she retires.
More consolidation, a prime government and regulatory objective could lead to more social housing and productive finance investments with larger providers better placed to use AI, technology and improve member communications and tackle the post-retirement advice gap. Advisers are already marching in this direction.
But hasten slowly. Remember the inevitability of gradualness. A market-driven approach to consolidation may be more effective than compulsory consolidation.
Smooth GPP transfers
An easy win to improve consolidation would be too smooth group personal pension transfers and also to encourage the consolidation of very small, old, overlooked insured DC occupational pension schemes.
Penny Cogher, partner at Irwin Mitchell, notes: “The there is no facilitation in the pension transfer legislation for the small DC occupational pension scheme to be transferred over without member consent to the master trust.
"The legislation prohibits this type of transfer, trapping members of these schemes in small, poor-performing schemes run by insurers.”
The stick approach of penalties for trustees of these schemes just causes a problem with no solution. Cogher explains: "This is because no one wants to be their trustee and without trustees, the schemes themselves cannot function."
