PLSA offers pragmatic alternatives to politicians' ideas for UK growth

Many of these ideas focused on increased direct investment in infrastructure, private markets and venture capital either through strong encouragement (government of LGPS funds), compulsion of DC funds (Nicholas Lyons, lord mayor of London), or radical consolidation of the whole pension market into a series of regional wealth funds. 

The Pensions and Lifetime Savings Association (PLSA) broadly agree that scale can deliver many advantages but, that there were many quicker and simpler ways of achieving the objectives set out in these various schemes. So today, to coincide with the start of its investment conference in Edinburgh, the PLSA has published ‘Pensions & Growth: A Paper by the PLSA on Supporting Pension Investment in UK Growth,’ a paper which highlights “a range of new solutions and policy levers to attract greater pension fund investment in assets that have the potential to drive growth in the UK economy”.

Different strokes for different folks

Pension funds are already large-scale owners of UK assets, says the report. Investments must meet the needs of savers and scheme members while schemes have a fiduciary duty to act in the interests of their members. However, this does not prevent them from investing in the right sort of UK investment assets, where the risk-return characteristics align with the scheme’s objectives. 

DC schemes are expected to double to around £1 trillion in the next 10 years, while assets in the Local Government Pension Scheme (LGPS) will swell to around £500 billion.  Meanwhile, private sector DB pension funds are expected to stay the same at today’s high value (£1.5 trillion) as most are closed to new members and future accrual, although as many as 500 schemes – managing assets of around £300 billion – remain open. These issues are important as schemes that are open and growing provide a good source of funds for further investment in growth-oriented UK assets.

Food for thought

The PLSA has identified a number of opportunities to encourage all types of pension fund to invest further in UK growth. Importantly, these measures do not inhibit pension schemes’ ability to direct the investment of their members private savings, and do not dilute their fiduciary duty to scheme members. The opportunities include suitable investments via long term asset funds or through the British Business Bank being given the scope to partner with funds that are capable of bundling the assets in a form suitable for pension funds. 

The PLSA would also like to see the tax treatment of domestic investment – as seen in Australia and France – investigated, as it sees merit in initiatives like the long-term investment for technology and science (LIFTS). However, these will require a clear plan for the future of the UK economy, on matters such as the Green Transition, if pension fund investment is to be attracted and allow the UK to compete with non-domestic assets.

The PLSA argues that open DB schemes should be given greater flexibility than is currently planned in the Pension Regulator’s DB funding code. Schemes with a strong employer covenant should be able to carry long-term risks as part of their investment strategy, even as they approach maturity. The trade body also called for reforms of the Solvency II regime for insurers that would incentivise them to directly take over more illiquid assets held by pension funds as they approach buyout. The operation of the current market encourages schemes to simplify their asset holdings, providing gilts and cash to the insurer, often incurring a ‘loss’ on their value.

Nigel Peaple, director policy & advocacy at PLSA, said: “The UK has one of the most sophisticated and mature pensions systems in the world – it is a great British success story, that provides security to tens of millions of savers. How pension funds can play a bigger role in providing capital to support growth in the UK economy is an important question, and in our discussions with schemes there is a clear appetite to invest in the UK – where it is in the interests of savers. Pension funds are open to increasing investment in UK growth provided it is in the interests of the savers whose money we manage.”

Automatic for more people

The PLSA also came up with some DC specific measures to focus on member outcomes, whether FCA rules on DC default funds and the regime applying to corporate IFAs are fit for purpose. 

For the automatic enrolment (AE) market, it proposes trustees making investment decisions demonstrate they have sufficient skill to be able to do so, how that might be achieved and that investment consultants under the regulatory oversight of the FCA. It calls on the government to increase AE contributions by removing the lower earnings limit and starting automatic enrolment at 18 instead of 22. It should also consider further increases in contribution levels from 8% to 12% over the next decade. 

The paper also contains measures specific to the LGPS and can be found on the PLSA website.