“Premature” derisking by defined benefit (DB) pension schemes is restricting their ability to invest in productive finance, according to a new report.
The report, published today (21 May) by New Capital Consensus, argued that DB schemes had suffered from “safetyism” by regulators and policymakers, which had seen balance-sheet safety prioritised over productive investment and return-seeking;
Schemes planning for buyout with an insurer typically derisk when members are in their 50s, the analysis found, rather than “more naturally” when members are in their 70s.
This has led to pension schemes investing heavily in gilts and liability-driven investment strategies due to regulatory pressures and accounting standards, rather than assets that could generate higher returns and make a bigger economic impact.
“We must urgently revisit the structure of the system and use the forthcoming Pension Schemes Bill to unlock growth through smarter consolidation.”
Ashok Gupta, New Capital Consensus
New Capital Consensus’s founding director Ashok Gupta called on the government to accelerate the establishment of DB superfunds, which he said could pool assets, spread risk, and pursue longer-term investment strategies.
“The UK economy cannot afford for DB capital to be locked into regulatory straitjackets or prematurely removed from productive use,” Gupta said. “We must urgently revisit the structure of the system and use the forthcoming Pension Schemes Bill to unlock growth through smarter consolidation.”
The report, titled ‘The Trillion Pound Question’, analysed the capital in the UK’s occupational pensions system and mapped over £2.2trn in assets. DB pension schemes dominate this total, responsible for 78% of assets, while defined contribution pension schemes account for 22%.
Speaking at an industry conference, Gupta said superfunds should be regulated as pension funds and not as insurance products. This would enable greater investment flexibility and avoid the restrictive capital rules imposed on insurers, he said.
He added that insurers should be allowed to set up superfunds outside their Solvency UK ringfences, enabling them to leverage their expertise without compromising prudential standards.
New Capital Consensus is a coalition of several organisations, including think tanks FinSTIC, Chatham House, and Radix Big Tent, as well as the University of Leeds. Its advisory panel includes Nigel Peaple, chief policy counsel at the Pensions and Lifetime Savings Association, Paul Johnson, director at the Institute for Fiscal Studies, and Katharine Braddick, a former director of prudential policy at the Bank of England.
