Pensions minister Richard Harrington laid out his intentions for the pensions industry today, speaking at the Pensions and Lifetime Savings Association’s annual conference in Liverpool.
Harrington declared his commitment to the success of auto-enrolment, but warned the hardest challenges still lie ahead.
I’m asking people why British pension funds are not investing as much in residential investment schemes, as a percentage of the total, as other people
Richard Harrington, pensions minister
“I personally am very wedded to [auto-enrolment], but I’m concerned that the hard stuff is coming,” he said. “We’re now dealing with an exponential growth in the amount of contributions from effectively 1 per cent to 3 per cent or 5 per cent in a short period of time.”
He added that the industry has “a lot of marketing to do” to ensure those who will be enrolled understand the benefits offered by going through the process. Part of this will rely on “de-jargonising” pensions.
'Comparatively simple' pensions bill
Harrington indicated what can be expected from the pensions bill, which has been put forward in parliament this week.
The bill is “comparatively simple”, he said, adding it was consumer-focused and aimed at giving mastertrusts the same level of regulatory background as other savings products, as well as introducing an immediate cap on exit fees.
“We can’t have a situation where some pension systems are regulated more than others,” he said.
On defined benefit investment
While admitting he was watching the challenges facing DB schemes “very closely”, Harrington warned against too much pessimism from the industry and press.
"I’m very wary of too much doom-mongering on this… It’s very easy for the press and everyone to say the sky is falling in. I am in very close touch with [Lesley Titcomb, the chief executive of] the regulator for her views on this and am watching everything very carefully."
He also queried why more pension schemes were not looking to invest in the UK rental residential sector.
“The best investment I’ve ever seen in my life, these residential investment schemes… I’d be queuing up for it if I was a pension fund. Historically you’ve got the best capital appreciation, you’ve got the yield built in, you’ve got a big shortage of product,” he said.
“I’m asking people why British pension funds are not investing as much in these things, as a percentage of the total, as other people.”
One solution, he said, was for the government to nudge schemes towards consolidation as a means of helping them achieve scale and access bigger deals.
“Several fund managers said this to me, ‘We can’t get in on these big deals because we’re too fragmented’. Maybe the government needs to nudge it," he said.
Pointing to the success of similar measures in Canada and the UK’s local authority pension schemes, he added: "That’s what happened in Canada and certainly as far as the UK’s concerned, where the government has done some nudging, like it’s done with local authority pensions, it has led to consolidation quite quickly.”
What to expect from the forthcoming pensions bill
Since the Pensions Act 2004 there have been six acts of parliament dealing with pensions policy – and this does not include the various finance acts that have changed the pensions tax regime.
Sponsor support
Speaking about the yawning gap in DB deficits, Harrington said he did not understand why companies would view the pension as not being their liability.
“Why isn’t it the same as a wage bill… I don’t understand the mentality of boards saying, ‘It’s not the same as any other liability we’ve got’… I don’t buy it that there’s a conflict between pensions and paying dividends," he said.
"There’s no conflict between dividends and every other expense of the company, why are pensions so different?”
