Smart Pension’s response to the Pensions Investment Review

We were happy to participate in the Chancellor’s Pensions Investment Review, headlined “unlocking the UK pensions market for growth”. It’s an area of enormous importance for us, for the 90,000 employers we work with and our 1.5 million pension scheme members.

In the interests of transparency, and furthering the discussion within the industry, I thought it would be worth publishing our thoughts.

Our support

We welcome the consultation in bringing forward discussion on a number of issues and supporting the development of a future vision for the industry. There are a number of important and welcome proposals in the consultation. In particular, we welcome the proposals to make it easier for legacy contract based schemes to consolidate. The market is very fragmented, especially pre-autoenrolment and there is a long tail of legacy arrangements with suboptimal charge structures and investments from which it would benefit the customer to move to something modern with more appropriate governance structures in place. Smart also agrees that the UK DC market has been overly focused on low charges and this has led to it being overweight in passive tracking equities. We are supportive of measures to change the focus to value and net returns – and use alternative forms of investment, such as private markets as part of that. 

Notes of caution

However, whilst we recognise the importance of scale, both for delivering value in investment and administration, we see huge risk and complexity with implementing a scale boundary test which is the primary means of governing permission to operate in the market. We also think there is limited evidence to support the suggested level of £25bn for such a test nor understand the logic to why it is proposed to apply only to defined contribution schemes being used for auto enrolment and not all DC workplace vehicles, especially legacy GPPs.

The unintended consequences of a scale test

Applying a scale test alone to assess whether a provider can continue to operate in a market would be unprecedented across modern global pension markets and in other related industries. For all the detailed reasons in our consultation response and those of the main industry bodies, PLSA and ABI, we believe there are also many damaging unintended consequences of such an approach. Additionally, it would be challenging to implement and would require a very complex set of regulations – requiring many exemptions. Applying at default fund level adds a further level of complexity and misses how in practice scale delivers improved value and asset growth opportunity for members. 

Ensuring we continue to enable competition

More importantly, enabling new entrants and competition is vital to ensuring consolidation and innovation continues. There is a long tail of small MTs, SeTs and GPPs – consolidation of smaller schemes will be undertaken by the mid-market not by those providers already ‘at scale’. Consolidation is expensive and carries risk. It's very unlikely a provider who is at £25bn would want to undertake consolidation of a scheme lower than £1 billion. Nearly all of the Master Trust consolidation done to date, in reducing from c70 to below 30 has been done by smaller and mid size providers. It would make no sense to consolidate the consolidators. In addition, ensuring new entrants and fast growing providers can continue to operate is vital to drive up standards and innovation. A closed market or Oligipoly like what we see in some of the Utility markets should be avoided at all costs. 

We should aim to be better 

For years, there has been an extensive focus on pension charges by Government and Regulators in the UK so it is not surprising that the market operates the way it does currently. New policy initiatives such as VFM will change this focus to value and are likely to speed up consolidation further. We are already beginning to see a shift to greater use of private markets, just from the positive debate regarding value and net returns that is being created by the Government and DWP alongside some subtle changes to make investment into private markets easier. Our aim should be the best not to copy Canada or Australia. The UK DC pension market continues to consolidate at a greater pace than Australia and has many strengths over this and other markets. We think the focus should therefore be to build on these strengths and take the best learnings from other countries . Let's strive to be better. 

Our recommendations

Our recommendations would be as follows: 

Recommendation one: Moving the focus from low charges to investment returns, through VFM

A standardised net returns measure should be brought forward from the VFM framework and implemented as soon as possible. This will move the focus from low charges to net risk adjusted investment returns. 

Recommendation two: Scale tests should also be through the VFM framework

Scale tests should be incorporated as part of the VFM framework to be used as benchmarks. This will ensure that the focus is on value for members above all else and is applied to all schemes – non-AE schemes and Single Employer Trusts. The VFM framework already suggests £10bn as the size of scheme that other schemes should compare investment performance to – this could be reviewed and increased. The VFM framework could also have disclosures and tests from private markets holdings. This will also ensure scale and private markets are a consideration of value much earlier than 2030. 

Recommendation three: Disclosures, or ‘comply or explain’, rather than forcing investment decisions

Creating greater investment into the UK specifically is more complex and there are macro-economic issues to solve. The quickest way to create greater investment into the UK would be fiscal incentives. However, outside of this, disclosures or a ‘comply or explain’ regime feel much more acceptable than forcing schemes to invest in the UK, which would threaten the Trustee’s fiduciary duty.

Recommendation four: Bring certainty through a roadmap to avoid sequencing risk

Finally we consider that there is a significant sequencing risk of some of the proposals in here versus other policy initiatives within the pensions regulatory landscape, including VFM, small pot consolidation, decumulation and the launch of the Pensions Dashboard. Providers need greater certainty to plan their futures and we encourage the Government to produce a roadmap to set out how their initiatives work together and when they come into effect. 

There are few topics more important in the UK than the pensions system, with many still not saving enough for the retirement they deserve. There is strong will within the industry to move forward many of the discussions that have been ongoing for years now, in the best interests of savers. Our own report ‘Delivery 2030: a blueprint to transform the UK pension system, deliver the future of retirement and leave no saver behind’ included many of our thoughts on how this could be achieved overall. We welcome the consultation moving forward some of these discussions, and are keen to progress in a manner that promotes a healthy industry with an overall focus on the best interests of UK pension savers.