Mansion House Update – consultations

Pensions

Chancellor Jeremy Hunt used his Mansion House speech in July to call for more investment in UK productive assets by UK pension schemes. As well as announcing the so-called ‘Mansion House Compact’, a commitment by 9 of the biggest UK pension providers to invest 5% of their default pension funds in unlisted equities by 2030, there were policy announcements covering all segments of the UK pensions market, including DB and DC and public sector pensions too.

See our previous Insights article covering our thoughts on the announcements here.

The speech was followed by several Government calls for evidence and consultations. We have summarised our responses below. There are links to the full responses at the bottom of this article.

Defined Contribution schemes – Helping savers understand their pension choices

The Government proposed that a duty be placed on trustees of DC schemes to provide decumulation services (that is information, support and benefit options at and through retirement). Members would still be able to take advantage of the full range of pension freedoms but a default option provided by trustees would also be available. Trustees could provide these services within their scheme or partner with another pension organisation. The Government are also encouraging a Collective Defined Contribution option for DC members on retirement.

In our consultation response, we were supportive of the focus on the decumulation phase for DC schemes. We were also supportive of the creation of a default option for members that don’t engage with trustees about their retirement options. However, we felt that defaults options should not be mandated and that trustees should be given enough flexibility to design retirement options that suit their membership. We also said that information and education for members about their retirement options are key.

Richard Birkin, Partner at Isio commented:

“There is a need for clarity around decumulation options and this has been overdue since the pension freedoms were introduced. It is important that as we finally act, the FCA and the Pensions Regulator are aligned to ensure all DC scheme members are offered a similar level of support. We believe that Government should encourage more effective financial education and transparency, to help members understand the default approach and the options available to flex this to find a winning solution for them.”

Defined Benefit schemes – increasing investment in productive asset classes

This Government call for evidence put forward various ideas intended to encourage DB schemes to promote economic growth in the UK. This included exploring the consolidation of DB schemes and how these schemes might be encouraged to invest in infrastructure, start-up companies and private equity. Some of the specific ideas discussed included making it easier for sponsors to access surpluses in DB schemes in order to encourage more growth-seeking investment and the creation of a public consolidation vehicle, perhaps using the PPF as a platform for this.

In our response, we were supportive of Government action to make it easier for DB sponsors to access scheme surpluses, with a share of surplus being available to fund benefit improvements. We were also supportive of consolidation and offered to give Government the benefit of our experience of running two DB master trusts, saving schemes money and improving governance standards. However, we did not support the development of a public consolidator. Such a vehicle would risk distorting the DB pensions market, a market in which consolidation vehicles, such as our master trusts but also Superfunds, are emerging.

Stewart Hastie, Isio Partner noted:

“The main reason that DB schemes have been investing more cautiously is 30 years of regulation driving them down that path. Sponsors have diverted cash to fund this derisking, resulting in much more protection for pension scheme members. We may be too far down the road to unwind this, but steps could be taken to put the brakes on. Trustees should have incentives to take modest levels of risk not as little as possible. For example, if trustees’ duties were to include improving members’ benefits – with regular distributions of surplus being shared between members and the sponsor. While this would encourage schemes to run on and adopt slightly higher investment return targets, it is more likely this may encourage more use of illiquid debt rather than illiquid equity.

The PPF is an industry-wide self-insurance vehicle which has never had a government guarantee. So it must be right that the benefits of surplus should pass back to the schemes and members that funded it.”

Pension trustee skills, capability and culture

This call for evidence focused on trustee skills and capability, the role of investment advice and barriers to trustee effectiveness and covered trustees of all types of occupational pension schemes, including DB, DC, hybrid and CDC schemes. The Government proposed that trustees should be registered with the regulatory authorities and asked whether wider use of trustee accreditation might be beneficial. The Government was also keen to learn how trustees use investment advisors and whether trustees’ interpretation of their duty to members leads them to be overly risk averse in their investment decisions.

In our response, we emphasized the point that research consistently shows that diverse groups make better decisions. So, in trustee boards, this is best served by a combination of professional and lay trustees, where the focus should be the capabilities of the whole board rather than those of the individual trustees. We were supportive of encouraging trustees to seek accreditation, though we would not support this being mandatory. We also said that we do not believe that trustees’ exercise of their fiduciary duties prevent them from seeking the best return for pension savers.

Claire Whittaker, Director at Isio, commented:

“Schemes are most effective when there are multiple trustees from different backgrounds. Concerns that professional trustees may become too dominant could be addressed by requiring that at least two professional trustees are appointed to larger schemes. We support making the bar higher, but care should be taken to ensure we still encourage fresh thinking in schemes in the form of new trustees. Whilst the intentions around an accreditation scheme to improve the standard of trustees are positive in principle, it may prove onerous and force lay trustees out. Even worse it could reduce the diversity on trustee boards. We must avoid this turning into a solution looking for a problem.”

Ending the proliferation of small deferred pension pots

In this consultation, the Government put forward proposals to solve the problem of the proliferation of small, deferred pension pots (in an earlier call for evidence, the Government estimated that there are around 12 million pension pots of £1,000 or less). The proposals involved the creation of several default consolidator funds (likely to be made up of some of the existing DC master trusts) that would consolidate each individual’s small pension pots and a central Clearing House, which would act as a central body to communicate between sending and receiving schemes. Many of the details are still to be worked through.

Isio did not respond to this consultation, but Richard Birkin added:

“We recognise the challenge presented by small pots and welcome ways of improving the process so that savers retirement outcomes are improved and we avoid wasting administration resources. While the proposed consolidator model isn’t the solution we would choose, it is time to pick one and get the ball rolling alongside the rollout of dashboards.”

What next?

It remains to be seen how many of these proposals will turn into firm policies and legislation. The next set of announcements are likely to come in the Chancellor’s Autumn Statement, scheduled for 22 November and the consultation on investments in the local government pension schemes is still open.