I struggle to believe that we are genuinely considering mandating investment in UK assets for larger auto-enrolment pension schemes.
While there have been a small number of public supporters, the discussions that I have had with my peers within the industry strongly oppose the proposal.
There’s also been some key detractors, including Bank of England Governor Andrew Bailey, who found the suggestions ‘inappropriate.’
I suggest that these comments won’t be particularly well received by Pensions Minister Torsten Bell and the rest of government. There’s a disconnect between the government and the pensions industry, and a significant lack of consultation between the two cohorts.
You have a wonderfully knowledgeable industry, who could appropriately challenge and suggest solutions that would help encourage pension saving in a sustainable way. The government need to use this resource.
Mandating investment choice is a dangerous line to tread and will only act as a further disincentivisation for people to engage with their pensions.
While auto enrolment takes the heavy lifting out of pension saving, it does not mean that people should not have discretion as to where their money is invested and how. UK investments have not historically provided the best returns, therefore in mandating investment in the UK, are they crystallising an investment loss for those invested, for the benefit of the government.
If indeed the result of this rule (if and when it’s enacted) is smaller pension pots when people come to retire, the point will have been well and truly missed. We need to be encouraging people to save responsibly for their retirement, and to invest over and above the current auto enrolment figure.
Pension trustees have a fiduciary duty to act prudently, and responsibly. Legislation (Pensions Act 1995) actually requires trustees to obtain and consider appropriate proper advice. It is therefore difficult to accept a trustee has acted prudently if their discretion to invest is fettered by a government diktat. If you were to argue that investing in an investment with lower returns over others on the market, you would ordinarily be in breach of duty. So why is it acceptable for the government to mandate this potential outcome?
It would be a mistake to enact this rule and I agree with Andrew Bailey, the proposal is both inappropriate and illogical. We need pension reform to make positive changes, and we need to drive investment in the UK. Top-down mandates won’t help solve the need for systemic pension reform. The absence of an in partisan, independent pensions commission is resulting in confusion, short term decision making and negative outcomes for savers, not to mention the stress (financial and operational) that this places on providers and trustees.
Implementation and monitoring could also cause increased costs. Will trustees or their investment advisers need to monitor and rebalance investment periodically so that any prescribed investment requirements are maintained?
I understand the rationale: pension fund investment in UK infrastructure, housing, and private markets could stimulate economic activity, create jobs, and support long-term national development. A recent WPI report found that large UK pension funds have already contributed £71.3 billion in gross value added and created 320,000 jobs through domestic investments.
Increased domestic investment could also deepen UK capital markets, improve liquidity, and support innovation, particularly in sectors like green energy and technology.
It’s better to encourage, than to force. Instead, perhaps the Government should concentrate on polices which are designed to make the economic environment attractive, where UK companies can thrive and thus attract investment on sound fundamental principles.
Similarly to the inheritance tax (IHT) changes coming down the track for pensions, it’s another missed opportunity for the government who could’ve worked with the pension and investment industries to create a system that both encouraged UK investment and delivered optimal outcomes for pension savers.
Martin Tilley is chief operations officer at WBR Group