Pensions Review – call for evidence

As part of the Government’s ongoing Pensions Review it launched Phase 1 on investments with a Call for Evidence for three weeks in September. The review made for some interesting bedfellows, focusing on investment strategies of Defined Contribution (“DC”) schemes and Local Government Pension Schemes (“LGPS”).  Isio’s Richard Birkin, Head of DC, and Steve Simkins, Public Services Lead, share some of the views in our response on the three key areas covered.

DC perspective – Richard Birkin

Scale and consolidation

“The DC landscape has seen commercial and regulatory pressure reduce the number of DC arrangements, which is a trend that will continue.  This should be positive for most savers as larger DC arrangements tend to have stronger governance, more sophisticated and diverse investment strategies, lower charges and better member communications.  In the absence of some form of compulsion, which they are likely to resist as it would be seen as a dilution of their fiduciary duty to members, DC scheme trustees will only include ‘UK productive assets’ into their default investment strategies if they offer attractive risk-adjusted net returns.”

Cost vs Value

“Competitive pressure has led to some herding of asset allocations and a focus on default strategies which give the lowest levels of charges, even at the expense of better long-term net returns. Price will always be a factor in selecting a DC provider and ensuring that the price being paid is commensurate with the value delivered is difficult. It is hoped that the new ‘Value for Money’ Framework will support making this assessment in a more balanced way than purely focusing on lowest cost.  Potentially, if the Government is concerned that too much focus on fee levels is harming savers, it could consider introducing a charge floor.”

Investing in the UK

“The consolidation of UK DC assets into a smaller number of large DC funds, could be structured to support increased investment in UK listed and unlisted equity and infrastructure as well as driving down investment and operational administration costs. DC Trustees are likely to prefer Government ‘carrots’ to incentivise UK investments by making them more attractive, but if the Government is looking to shift the dial quickly if may need to resort to some ‘sticks’ in the form of specific mandates.”

LGPS perspective – Steve Simkins

Scale and consolidation

The Government was interested in views on the success of LGPS asset pooling in delivering improved long-term risk-adjusted returns and in the potential for reducing the current number of funds through consolidation.  Steve commented “The term ‘long-term risk-adjusted returns’ hasn’t been defined across the LGPS, but we agree this is right thing to consider. The current LGPS governance structure requires LGPS funds to set their overall investment strategy, based on their risk appetite. LGPS pools need to deliver returns for the selected asset classes. Therefore, it is the funds who deliver risk-adjusted returns and not the pools. We are concerned that the question either misunderstands or is seeking to re-shape the current governance structure, giving too much attention to the pools and not enough to the funds and their employers.”

Cost vs Value

“Acknowledging that there should be no hidden or unnecessary investment expenses, the focus should be on maximising net returns rather than minimising investment expenses in isolation.  The financial risks to LGPS members are remote as the primary bearer of risk is the employer. Risk based decisions and the associated target net risk-adjusted investment returns should take into account employer views and/or the Government’s view on those employers where they are centrally funded, e.g. local government.”

Investing in the UK

“Overall, we believe that Government should be bold in its future policy decisions for the LGPS and should seize the opportunity to address LGPS consolidation and productive finance together with a mandated approach that can be implemented and overseen centrally rather than locally.  However, consolidating LGPS funds will take time and if quick UK productive investment wins are required, a mandated approach to investment strategies with a well designed risk/return strategy will allow the LGPS to fulfil its fiduciary duties to employers while also meeting Government objectives.”