Can the City’s pension superfund dreams become reality?
Government must go further and faster in reforming the UK’s pensions market if ‘superfunds’ that pump cash into the stock are to become reality, experts have warned.
City figures have been pushing for an overhaul to the UK’s legacy £1.4trillion ‘final salary’ pension market to boost growth of assets and unleash capital into the stock market.
In a consultation in July, the Department for Work and Pensions revealed plans for an overhaul of the market including ramping up the role of the Pension Protection Fund to act as a central body that could absorb and consolidate other schemes.
Consolidated ‘superfunds’ made up of the UK’s fragmented pension schemes have been tabled as a potential solution to a dearth of investment in domestic companies.
The moves to shake-up the market come amid a wider shift to try and get pension cash invested in domestic companies. Pension investment in UK firms has plummeted over the past two decades, with just four per cent of the market now held by pension funds, down from 39 per cent in 2000.
However, experts have now warned that more fundamental reshaping of the market is needed if ministers want to boost the flow of cash into the market.
“On the face of it, DB superfunds ought to be perfectly aligned with the government’s desire to see a smaller number of large pension funds, investing for growth,” former pensions minister and now consultant at LCP, Steve Webb, told City PM
“But there has been a long period of regulatory uncertainty and there is still no legal framework for the basis on which superfunds would operate.”
While the government is now “making more positive noises around consolidators”, Webb added, more needs to be done to “give trustees and investors the confidence to proceed”.
The government has been hoping to unlock the deep pool of pension cash in UK retirement money and emulate the superfunds seen in countries like Australia and Canada, which invest more in homegrown companies and have achieved better returns than the UK schemes.
Currently the UK’s pension market is far more fragmented, with around 5,200 schemes across DB with on average less than £400m under management. Moves are also underway to consolidate the UK’s fragmented and newer defined contribution pension market, where there are around 27,000 schemes currently operating.
PwC’s global pensions chief Raj Mody warned that consolidation was still a “minority sport” however, and consolidation in the DB market was still some way off under the current regulatory framework.
“There is some movement from [The Pensions Regulator] but it’s incremental, not transformative,” Mody told City A.M.
“There is nothing so transformative that all the schemes would say ‘let’s go toward consolidation’.”
Ministers are looking to trigger some movement towards consolidation with the latest consultation. However, the department for work and pensions conceded that moving too fast could trigger major negative consequences.
“Government is acutely aware that changes to how this level of assets are invested can have considerable effects on the economy, both positive and negative, so we will need to go cautiously and understand the impact of any suggestions on the UK economy as a whole,” the government said in July.
The plans have also received vocal pushback from big name industry bodies and regulators.
The Prudential Regulation Authority voiced concerns last week that regulatory guidelines could slip for the funds and force insurance firms into buy-outs. Speaking to MPs in a Treasury committee hearing, Sam Woods, chief executive of the Prudential Regulation Authority (PRA), concluded that superfunds were acceptable “so long as they don’t undermine the security of insurance firms”.
The Association of British Insurers also sounded the alarm over the government’s Pension Protection Fund proposals, which it said risked “introducing moral hazard into DB scheme decision making” by distorting the booming insurance buy-out market, in which big insurers buy-out corporate pension schemes.“
In a statement to City PM, the department for work and pensions said it “remains committed to having a permanent regulated Superfunds regime” and will legislate as “soon as parliamentary time allows”.
“This will ensure we maintain momentum and cement the legacy of this important innovation,” a spokesperson added.