The drive towards “fewer, larger pension schemes” being driven by the Pension Schemes Act could boost individual pension pots by up to 20% if executed well, according to new research by WPI Economics and Standard Life.
The act – and the subsequent consultation launched by the Department for Work and Pensions – aims to consolidate defined contribution (DC) providers into a small number of “megafunds” with at least £25bn in assets under management.
Standard Life, which has already hit this mark across its trust-based and contract-based offerings, said the shift to a consolidated, “value-focused” DC system could lead to a significant economic boost for the UK and create hundreds of thousands of jobs, as well as improving retirement outcomes.
Success would require “clearer implementation of reforms, with a shift from cost to value, supported by a clear and consistent regulatory framework”, Standard Life said in a press release.
“Getting this right is essential to improving financial security in retirement while also ensuring pensions can support long-term investment in the UK economy.”
Andy Briggs, group CEO at Standard Life, said: “The UK pensions system is at a critical juncture. While auto-enrolment has transformed participation, too many people remain at risk of falling short in retirement.
“The next phase must focus on how reforms are implemented in practice, ensuring that pension savings are translated into better outcomes through greater scale and a stronger emphasis on long-term value.
“Getting this right is essential to improving financial security in retirement while also ensuring pensions can support long-term investment in the UK economy.”
Diversification and scale key to higher returns
Allocating more to private markets could “materially improve long-term returns for pension savers”, Standard Life said. At a launch event in London yesterday, Matt Burrell, head of public affairs at Standard Life, argued that an allocation in the region of 40% was more reflective of the balance of private and public assets worldwide.
The report estimated that average allocations within growth default arrangements could increase from around 2% to 4% today to between 15% and 30%.
“The evidence points to a significant opportunity to improve outcomes, but realising this will require coordinated action across the market and a regulatory framework focused on delivering higher net value for members.”
Joe Ahern, WPI Economics
Joe Ahern, director of policy at WPI Economics, said: “Our analysis shows that greater scale and more diversified investment strategies, particularly increased exposure to private markets, can deliver higher returns for savers while supporting infrastructure, businesses and economic growth.
“The evidence points to a significant opportunity to improve outcomes, but realising this will require coordinated action across the market and a regulatory framework focused on delivering higher net value for members.”
The benefits of scale would also be recognised through access to bigger ticket investment deals, more preferential terms, and a lower cost of operations and administration as providers become more sophisticated as institutions.
Pensions minister Torsten Bell supported the report’s findings, which reinforce the government’s drive to consolidate the DC sector.
“Size matters in pensions,” the minister said at the launch event yesterday (24 June). “It matters for economies of scale and administration costs, but it also matters for what you can do in terms of asset allocation.
“It [also] matters for active ownership levels. The nature of your ownership matters, particularly for some asset classes, and how assets are managed and who owns them matters.”
Domestic investment to increase as DC grows
The DC sector is expected to grow to more than £1.8trn in assets under management by the mid-2030s, with government data indicating that it will eclipse defined benefit assets by the turn of the decade.
As it grows and private markets allocations increase, Standard Life’s report estimated that between £40bn and £200bn could be invested in UK unlisted assets such as infrastructure. Infrastructure spending alone could generate £115bn in economic output and support 333,000 jobs, the report forecast.
To achieve these aims, the Standard Life and WPI Economics report urged the government to establish a “clear, consistent and outcome-focused regulatory framework”, including the Value for Money regime.
Bell told attendees at yesterday’s launch event that the government would soon be publishing its latest detailed consultation on Value for Money, as well as an updated “roadmap” setting out how reforms will be sequenced and phased in.
Intermediaries such as consultants should also help to “drive competition and value”, the report said, to further support the aims of the Pension Schemes Act.
Recommendations also included strengthening governance by raising standards in trusteeship, aligning pensions policy with wider economic and industrial strategy, and working to support “effective and sustainable access to retirement income”.
