Open Editor's Digest for free
Roula Khalaf, Editor of the FT, selects her favorite stories for this weekly newsletter.
The UK government should prioritize reform of the UK's £1.2tn defined benefit pension system to unlock billions of pounds for investment, according to asset managers.
In November the government announced plans for a series of “megafunds” across the defined contribution (DC) and local government pension schemes to drive more investment in Britain's infrastructure and fast-growing companies.
But there are still no plans for defined benefit pension schemes (DB), despite a previous government consultation earlier this year that explored ways to allow companies to access scheme surpluses, which would encourage them to invest more in risky assets.
“We think it is important that DB schemes are viewed as a priority – they have the potential to get money into the world faster than other sources,” said Jos Vermeulen, head of solution design at Insight Investment, which manages 665bn of assets. in the UK.
“There is a limit of up to £100 billion to be released over the next 12 to 24 months. . . this is a once in a generation opportunity to change the fortunes of the UK. . . if you lose that chance it may be over,” he added.
Owen McCrossan, head of pensions investment for the abrdn group, said DB pension schemes were “definitely a part of the fund that could help close the productive capital gap”.
A 5 per cent allocation to productive assets such as real estate and infrastructure “could raise around £50bn”, he added.
That's the same amount the government hopes to drive into productive assets by 2030 under its plans to consolidate defined contribution schemes into workplace funds with at least £25bn of assets.
Calls for the government to revise the rules surrounding DB schemes come as it delays a review on pension adequacy. The review was expected to set out plans to increase the rate of auto-enrolment pension savings, which the government hoped would drive more investment in the UK.
Vermeulen said that the main thing is that the DB pension reform should be included in the pension bill that should be introduced next year.
In an interview with the Financial Times last month, pensions minister Emma Reynolds said she prioritized reforming the defined contribution scheme in the workplace because “that's where the growth is”.
He noted that many of the company's defined benefit pension schemes have been closed to new members and “naturally have a short cut-off period” as schemes move into less risky assets as they liquidate or sell their pension obligations to the insurance company.
However, industry insiders say the sharp improvement in the funding situation of defined benefit schemes in recent years means that many have been in a position to take on more risk, if the rules enable companies and scheme members to benefit from it.
To encourage schemes to “go ahead” and invest in productive British assets, Vermeulen proposed that the Pension Protection Fund pay 100 per cent of pension liabilities in the event that the scheme cannot meet its obligations. Currently it pays between 70 and 90 percent.
The PPF's annual fee may rise as a result, but the government may waive the fee if the fund invests in UK infrastructure or growth companies.
“The government can say to go ahead, to promote investment schemes in productive assets, if you invest at 5 percent you pay zero tax,” said Vermeulen.
Companies have been quick to offload their pension obligations to insurance companies in recent years, with a record £60bn transaction last year, according to the PPF. But this can be slow if schemes can ensure full protection from PPF and if companies can benefit from the surplus.
In its response to the first phase of the pension reform, the Investment Association, which represents the UK fund management industry, urged the government to “allow the safe release of surplus funding” for DB schemes, although formally outside the scope of review.
“Subject to certain safeguards placed on surplus withdrawals so that the security of profits is not weakened, the ability to withdraw surpluses can provide an incentive to build surpluses by taking more investment risk, in line with the government's broader objectives,” said the IA.
The Department for Work and Pensions said it was reviewing responses from the previous government's consultation on the choice of defined benefit schemes and a decision on the flexibility of the balance “will be made in the coming months”.