The Pensions and Lifetime Savings Association (PLSA) has identified 12 ways to make UK assets more appealing to pension funds so the funds can help support the UK economy.

It has published its proposals today ahead of its annual investment conference in Edinburgh this week.

Nigel Peaple, director policy & advocacy, PLSA, said: “How pension funds can play a bigger role in providing capital to support growth in the UK economy is an important question, and in our discussions with schemes there is a clear appetite to invest in the UK - where it is in the interests of savers.

“We have identified a dozen interventions to address these issues. These range from ensuring there is a suitable pipeline of investment opportunities, packaged up by the asset management industry and government so they are suitable for pension fund needs, to targeted regulatory and fiscal measures, including some related to the operation of the AE market. They build on current Government initiatives and address the needs of the pensions landscape as it is now.

“Pension funds are open to increasing investment in UK growth provided it is in the interests of the savers whose money we manage.”

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The PLSA’s dozen UK asset interventions

• establish a rich, and continuous pipeline of enterprises needing investment for providers to bring to market and investors to choose from. The asset management industry should be encouraged to focus on sourcing UK opportunities and developing new investment funds and products (such as Long-term asset funds) which are appropriate to pension fund needs. The British Business Bank should be given an extended scope to support companies that need scale up capital, and to create or partner with funds that can bundle up the assets in a form that would be suitable for pension funds.
• Fiscal incentives: Initiatives like the Long-term Investment for Technology and Science (LIFTS), which alter the risk-return component of an investment, are appealing to pension funds provided the financial support from Government is of a long-term nature. Enhancing the tax treatment of domestic investments, as they do in France and Australia, merits exploration.
• Policy certainty: Setting out a clear plan for the future of the UK economy, for example on the Green Transition, will help draw pension fund investment and allow the UK to compete with non-domestic assets.
• Measures specific to Defined Contribution funds include: Automatic Enrolment market – Employers & Corporate IFAs: The market should be incentivised to ensure that those purchasing workplace pensions, usually employers acting on advice from Corporate IFAs, balance net performance and costs, focusing on ultimate member outcomes. Government should consider whether the FCA rules on suitability of “DC default funds” and the regime applying to Corporate IFAs are fit for purpose.
• Automatic Enrolment market – Trustees & Investment Consultants: Where trustees make investment decisions, more should be done to ensure they have the skills necessary to the task and that they receive good advice from investment consultants. Consideration should be given as to how to enhance the skills of trustees and to bringing investment consultants within the regulatory perimeter of the FCA. (NB. The Master Trusts authorisation regime already requires that the trustees running the scheme have the necessary skills to manage complex investments.)
• Scale in DC Products: The quickest route to achieving volume and scale is by using “fund of fund” investment vehicles, for example, by including a mixture of lower risk growth assets, with some higher risk venture assets, to produce a more balanced investment, rather than further speeding up consolidation of DC. (DC consolidation is already happening both due to market pressures as large Master Trusts compete for business, and due to regulatory interventions from DWP/TPR pushing the smallest schemes to consolidate if they cannot demonstrate value for money.)
• Automatic Enrolment contribution levels: The Government should press ahead with its very welcome plan to increase AE contributions by removing the lower earnings limit and by starting automatic enrolment at age 18 instead of 22. Only by increasing the flow of new assets into DC pensions can we hope to provide more capital, and better retirement incomes, in the future. The Government should also consider further increases in contribution levels from 8% to 12% over the next decade.
• Measures specific to the Local Government Pension Scheme (LGPS): The Scheme Advisory Board’s Good Governance review should be implemented as soon as possible. The government should work with Funds and Pools to understand the comparable international governance models to identify and establish best practice.
• Asset Pools: Following the enormous changes to the management of LGPS assets, which involved consolidating from around 90 separate pension funds into eight asset pools, the primary focus should now be on ensuring the current structures work well via the provision of guidance or regulation to support collaboration between and across funds and pools.
• Resources: More resource is required to ensure the effective operation of the LGPS, including within its supervisory bodies (DLUHC, SAB, TPR).
• Measures specific to Defined Benefit funds: TPR DB Funding Code: More flexibility should be given to open DB pension funds than is currently planned in TPR’s DB Funding Code. Where supported by a strong employer covenant, open DB pension schemes should be able to carry long-term risks as part of their investment strategy, even as they approach maturity.
• Solvency II: Reforms are also needed to the solvency regime for insurers such that it would incentivise them to directly take over more illiquid assets held by pension funds as they approach buy-out. The operation of the current market encourages schemes to simplify their asset holdings, providing gilts and cash to the insurer, often incurring a ‘loss’ on their value.