Mansion House reforms will significantly alter structure of industry and must be carefully managed

The Pensions and Lifetime Savings Association (PLSA) sees the opportunity for better saver outcomes arising from these changes, but they must be carefully managed.

Commenting on the Government’s response to a package of consultations, comprising the Pensions Investment Review and the Local Government Pension Scheme (England and Wales): Fit for the future consultation, the PLSA cautioned that mandating schemes to invest in a particular way poses risks to savers.

Julian Mund, Chief Executive of the PLSA, said: “We believe that the best way of ensuring good returns for members is for investments to be undertaken on a voluntary, not a mandatory basis. We are confident, following the signing of the Mansion House Accord in which large DC schemes undertook to increase UK investment, that mandation will not be necessary. Any government intervention to direct how savers’ money is invested is risky. If government doesn’t create the right environment with a suitable pipeline of investment opportunities, it would involve downside risk for scheme members. Trust in the system could also be impacted. Trustees are there to do what is best for savers. Any reserve power on mandation must be drafted with extreme caution.

Zoe Alexander, Director of Policy and Advocacy at the PLSA said: “Increased consolidation has the potential to improve retirement outcomes through improved governance, wider investment diversification and improved bargaining power. It can also foster economic growth. However, these are big changes that will have significant implications for how UK pension schemes operate. Care must be taken to ensure the reforms work in the interests of millions of pension savers.

Defined Contribution schemes

The DC scale tests will accelerate consolidation that is already well underway. It is important that, in the process, the test does not lead to market distortion, so we would encourage action from regulators to maintain market stability in the near term. Many smaller schemes offer excellent value to members, bring innovative approaches to the market, and have credible plans to get to scale fast. We are pleased the Government has acknowledged this with a practical solution to allow successful and innovative schemes flexibility to reach the required scale. It is in members’ interests that those schemes succeed. Ensuring there are routes for new entrants to come into the market and exemptions for CDC and some hybrid schemes are also positive choices.

The proposals to introduce contractual overrides to allow schemes to more simply transfer members to newer, better value defaults from legacy products is very welcome – enhancing benefits for members, as well as enabling consolidation and improving efficiency in the sector.

Local Government Pension Scheme

After earlier reports about the future of Access and Brunel, the proposals around the future of LGPS pooling do not come as a surprise. Funds and Pools are working hard in the background to make a success of this process, and it is positive the Government has signalled that further consolidation of the Pools is not in its immediate plans. However, the timeline for delivering and implementing the changes is overly ambitious, especially in the context of wider local government reforms, and recent elections. The PLSA encourages government to continue engaging with Funds and Pools to develop a roadmap for delivery that is more practical and realistic.

The new power to direct an authority to a specific pool should only be used as a last resort, as such decisions require highly specialised and localised knowledge of the funds’ specific circumstances.

The clarification of the responsibilities between Funds and Pools is important. Since Funds will remain accountable to LGPS members it is essential that Funds continue to set and drive their investment strategy. For the same reason, whilst the requirement for pools to provide principal advice to Funds has been confirmed, and many Pools either operate on this basis already or have started to build capacity to deliver this, the acknowledgement that independent advice may still be needed is crucial. This will be especially true in the early stages of implementation and as some Funds consider their pooling approach.

We welcome the recognition from Government that Funds may wish to establish an oversight structure of their pool, which the PLSA asked for, and agree these should be created in collaboration between the pool’s partner Funds.

Our members strongly support the introduction of the Good Governance recommendations. Confirmation that these will be introduced as soon as possible is very welcome. Moving to a three-year review cycle is also welcome and practical. It is essential that all Funds can demonstrate strong governance and that Committee members and LGPS officers have a robust training strategy, including conflict of interest policies.

Fiduciary duty and mandation

Fiduciary duty in its current form has worked well to ensure savers’ interests are protected and it does not prevent schemes from investing in the UK. Indeed, UK pension funds already invest almost £1 trillion in the UK through a mixture of asset classes. To increase this, the best route is industry working in partnership with Government and voluntarily increasing UK allocations in a way that is consistent with member interest. The Government’s support for the Mansion House Accord and its announced measures to boost the pipeline of opportunities, are positive steps in this regard.

Further steps towards prescription, including changes to the law that impact fiduciary duty, are not straightforward, and involve downside risks for scheme members. While we acknowledge government only sees use of a mandation power as a ‘last resort’, we do not think this is the right approach. If mandation is used, robust governance will be imperative. This includes clarity on how and why it would be used, reasonable sunset clauses so that the power cannot be used indefinitely, member and trustee safeguards, and a sufficient pipeline of investible assets to invest in.

DB surplus release

The Government has also published its response to the Options for Defined Benefit schemes consultation.

The PLSA welcomes the measures being introduced in the forthcoming Pension Schemes Bill to provide trustees with a statutory override and a clear legal and regulatory framework for DB surplus release. Aligning the proposal with the low dependency requirements – which is set to be consulted on – in the Funding Code, alongside clear guidance from TPR to protect member benefits, means surplus release by schemes could provide an opportunity to improve member benefits, boost DC pension contributions, and support new types of investment, with appropriate saver protections.

Mark Smith, Head of Media Relations

020 7601 1726 | [email protected]

Cali Sullivan, Senior PR Manager
020 7601 1761 | [email protected]