Lindsay Nickerson, chair of the DC Investment Forum, argues that investment-related sections of the Pensions Commission’s interim report may go against some of its other aims and objectives.
The Pensions Commission’s interim report is an important piece of work. The demographic data is sobering, the direction of travel on contribution rates and coverage is long overdue, and the adequacy gap it describes is real.
But deep within the lengthy report, the investment chapter contains a number of concerning contradictions. For example, the commission observes, correctly, that a 1% improvement in annual returns produces a 30% larger pot at retirement.
It then holds up Australian MySuper funds as a model, praising their admirably narrow return variance compared to UK schemes. And while both observations may be valid, they sit uneasily alongside one another.
Indeed, it is important to understand that Australian super funds achieve that consistency by allocating heavily to infrastructure, private equity and unlisted assets. These appear less volatile largely because nobody marks them to market every Tuesday. The risk is still there; it is just wearing a less alarming outfit.
This is where the Pensions Commission’s own framework starts working against its stated ambitions. The proposed value-for-money (VfM) framework will rank schemes publicly on cost and short-term peer-relative returns. The rational trustee response to that is entirely predictable: liquid, cheap, passively managed global equity. After all, nobody ever got sued for being average.
Pensions Commission calls for ‘new national settlement on pensions’
The Pensions Commission’s final report is slated for early next year, with Baroness Jeannie Drake promising that it will “address the need to secure adequate income in later life and a pension system that is fit for decades to come”. Read the full story.
Mind the gap(s)
The report also calls for stronger stewardship of pension capital, in the same document that benchmarks ambition against a Swedish state fund running passive equity at a cost of 0.1%. Passive ownership at scale is not stewardship. It is a stewardship-shaped absence.
To be clear: the Pensions Commission is right that poor governance and high fees have, in places, damaged member outcomes. But there is a meaningful difference between removing bad actors and engineering a race to the median.
It is worth noting that the evidence for a different approach already exists within the UK system. The largest master trust in the UK, the scheme created by the last commission’s reforms and the default home for millions of lower-paid workers, has, in recent years, begun allocating to private markets precisely because its investment team recognised the long-term return gap that passive liquid equity alone cannot close.
If the scheme the first Pensions Commission built has already reached that conclusion, it is reasonable to ask why the framework being designed around it points in the opposite direction.
Capital with conviction
The 15 million people currently undersaving for retirement are not going to be rescued by a framework that rewards being cheaper than average. They need capital that is actively working for them, invested with conviction, governed with accountability, and measured on outcomes over decades, not quarters.
The 2027 final report has a genuine opportunity here. A VfM framework that measures net returns over 10 years rather than three, that makes space for illiquid allocations without penalising short-term volatility, and that defines stewardship by engagement rather than index weight – this would be a framework worth building a pensions system around.
The Pensions Commission has correctly diagnosed the problem. The question now is whether the recommendations will be brave enough to match it.
Lindsay Nickerson is chair of the DC Investment Forum.
