About the DC Investment Forum
The DC Investment Forum (DCIF) is a group of asset managers who believe that a well-designed and diverse investment strategy has an important role in delivering a comfortable retirement for millions of DC savers.
A not-for-profit organisation, we commission and publish research which shines a spotlight on DC investment issues and prompts debate about best practice. We hope the people who determine DC pension schemes’ investment strategies will use it to inform their work.
Question 1: Do you think that providers should be restricted to a limited number of default funds, and if not why? Please consider any equality considerations, conditions and to what extent saver choice could be impacted.
We understand that the government is keen to accelerate consolidation and simplify the market, but we are unconvinced that this is the best way to go about it.
What would be the ‘right’ number for the maximum number of default funds? Ultimately, this would remove options for members – is that what the government wants to achieve?
Consolidation is likely to happen without intervention from the government; schemes which may previously have been run in-house with a bespoke solution are increasingly outsourcing to master trusts, as the rapid growth in master trusts’ memberships and assets under management demonstrates.
The introduction of the value for money framework should also result in fewer, well governed default funds of a suitable size.
In a recent podcast conversation with Paul Watson, who has years of experience in the Australian superannuation market (which we will release soon), he cautioned UK policymakers that consolidation will take time. However, we believe that the government has put all the right conditions in place to enable an environment of large, well-governed pension schemes.
There are other downsides to introducing further policy requirements in this area. Some providers offer default funds with a specific focus – ESG or Shariah, for example. Limiting providers to a certain number of default funds could disenfranchise minority sections of scheme memberships.
DC pension schemes have different objectives and circumstances. Some have an underpin and may pursue a very low risk investment strategy. Other schemes may be pursuing a high return. Given these considerations, limiting the number of defaults is risky.
Finally, limiting the number of defaults creates concentration risk. A small number of pension schemes are likely to look over their shoulders at what others in the market are doing and investment strategies may end up looking very similar. If there is a risk event, this then means everyone is invested in the same way. In investment, variety is the spice of life.
Question 2: The proposed approach at default fund level could mean that the number of default arrangements would remain unchanged. Will imposing the requirement at this level have any impacts on the diversity of investments or the pricing offered to employers?
A proliferation of default funds does not preclude master trusts from investing in private market opportunities. If (for example) a large, attractive infrastructure opportunity were to arise, master trusts could theoretically pro rata this opportunity across 20 different default funds. Australian superannuation funds already do this.
A small number of mega funds would primarily be looking for the largest types of private market assets in the UK. If that were the case, then they could drive up the pricing of those assets. Again, variety is the spice of life, both when it comes to private market opportunities and the pension schemes which are looking for them. Diversity of default funds would help access at different price points to different investment opportunities.
Question 3: What do you think is the appropriate minimum size of AUM at default fund level within MTs/GPPs for these schemes to achieve better outcomes for members and maximise investment opportunities in productive assets?
Fundamentally, the DCIF believes the larger the pot of assets, the wider the opportunity set for a pension scheme. Large pension schemes will be able to negotiate lower fees on assets, which can be passed on to end members.
Perhaps the government should also consider: is there a minimum AUM level at the provider across their default fund set, rather than across individual default funds? The size of a provider is the critical factor in unlocking access to the world of private markets.
Questions 4-10. Are any other flexibilities or conditions needed regarding the minimum size of AUM (e.g. should it be disapplied in circumstances at regulators discretion for example to enable an innovator to provide competitive challenge in the market or be disapplied in case of a market shock or another specified circumstances)?
We believe there should be flexibility in this area. The result of imposing conditions on minimum AUM could be a monopolistic situation, where the winners will be insurance companies.
If minimum AUMs were imposed, the government could force a tranche of independent and innovative master trusts out of the game. Such master trusts offer different advantages to their larger peers. Some of them are nowhere near £25bn AUM, but all offer different benefits to members (ESG, fin tech and an innovative approach to member engagement, for instance). Would this condition mean they could no longer operate?
Many of these smaller master trusts have very ambitious long-term growth ambitions – which they may well not achieve by 2030. Imposing such a condition at this stage could stymy their chances before they have a chance to flourish.
This condition would also effectively make it impossible for any new and disruptive innovators to enter the competitive space.
We think the government should steer clear of risking a monopoly, where only the big life insurers survive. Those insurers will most likely pursue passive, index tracking for most of their portfolio. The upshot of that would be limited diversification and, most likely, limited access to private markets for members.
Question 11: How would moving to a single price for the same default impact positively or negatively on employers, members and providers?
If you are a £3bn scheme and you are getting charged the same as a £30m scheme, you might feel a touch resentful.
There could also be unintended consequences of moving to a single price. Companies’ employee turnover differs, and companies with high turnover will be charged more for administration. Therefore, by moving to a single price, the industry could end up subsidizing companies with high turnover rates.
We think the government should move away from a focus on price at the expense of all other considerations. Competitiveness and a free market should be the priority.
Question 12: Under what circumstances should providers be able to transfer savers to a new arrangement without their consent?
We are broadly supportive of this principle. Members should not be left to languish in legacy or poorly performing funds when moving them to a new arrangement would improve their outcomes. As this question pinpoints, the challenge is in what circumstances it is permissible to move them without their explicit consent.
We think there is merit to the use of inertia, with parallels to auto-enrolment. Providers could inform people of a change that will be made unless they choose to respond and request something different. Providers and master trusts should give plenty of warning and make it easy for people to respond (perhaps online via an app or give an e-mail address and contact number).
Question 13: Do you think that an independent expert, such as an IGC, should be responsible for undertaking the assessment of whether a transfer is appropriate?
Yes, it does make sense to have a formally appointed, independent expert overseeing this process. This additional level of governance is an important aspect of safeguarding members.
Question 25: How should the cost of the transfer be borne?
Transfers can be costly and it doesn’t feel right that this should be passed on to the member. Assessment of value and member outcome and benefit to the member should be taken into account, alongside the magnitude of the cost.
Question 29: Do you think establishing a named executive with responsibility for retirement outcomes of staff could shift from the focus on cost and improve the quality of employer decision-making on pensions?
This is extremely ambitious and we don’t think it’s a good idea. Most employers will not have the knowledge, resources and governance capacity to make these kinds of assessments, especially the millions of smaller businesses. To ask them to go beyond the requirement to put their employees in a pension scheme is unrealistic.
Larger, well-resourced and more paternalistic companies may have the resources and the will to do this, but we don’t think it should be compulsory.
The value for money framework has been brought in for a reason and should help to address these issues.
Question 30: What evidence is there that placing a duty on employers to consider value would result in better member outcomes? If such a duty was introduced, what form should it take? Should it apply to a certain size of employer only? How can we ensure it is easier for employers to make value for money comparisons?
Again, we think the value for money framework should address this without the need for an employer duty. As we’ve seen in the Australian and New Zealand markets, league tables are likely to emerge as master trusts mature. They will also help with the value for money assessment and shift the focus to net returns. When this becomes visible, the rest takes care of itself. Once three to five-year performance starts to be published, it will become clear who is lagging and who is leading. This is likely to happen in due course.
Question 31: What evidence is there that regulating the advice that some employers receive on pension selection will better enable them to consider overall value when selecting a scheme?
We are not aware of any direct evidence to support this assertion. At the start of auto-enrolment, millions of employers were enrolled, and this would have been potentially quite helpful then. But now, employers have chosen their scheme. This could just be a costly exercise that doesn’t deliver value.
Question 32: What evidence is there that regulating the advice that pension schemes receive on investment strategies would enable more productive asset allocation? What type of regulation would be effective?
Investment advice is already regulated and we think the regulation works as it stands, so no further comments to add here.
Thank you very much for reading the DCIF’s response. If you would like to discuss the issues we’ve raised in any more detail or have any questions, please contact Louise Farrand ([email protected] / 0791 631 8062).