In their response to the Unlocking the UK Pensions market consultation, which sets out the Government’s proposed reforms to deliver scale and accelerate consolidation in the DC Master Trust market, LCP say that consolidating these schemes will take a long time, cause massive cost and disruption and may still fail to deliver the Government’s stated objectives of investing more in the UK.
LCP are proposing that instead of using scale as a proxy for UK productive finance, the Government should instead be explicit about what it means by productive finance types of investments that it wants to see and where investment is needed. They then propose establishing a new ‘comply or explain’ regime for DC scheme investments, one which goes beyond existing disclosure requirements. Trustees and providers would retain their freedom to invest in the best interests of members but would have to explain to the regulator if they had concluded that this was not compatible with a specified minimum allocation to, for example, UK infrastructure.
Other points raised in LCP’s response are:
• The member perspective needs to remain central and structural changes shouldn’t undermine good member outcomes. Large-scale consolidation would require substantial and costly upheaval over a period of years, and we need to ensure that the costs of this, which will ultimately be borne by members, improves their outcomes.
• There are concerns that a small number of ‘too big to fail’ providers and a market that has too many barriers to entry could stifle innovation. The changes to gain scale in the short term will drive the focus of the industry rather than focus on investing in productive assets now.
• Consolidation will take time. The Government is talking about not implementing these changes until 2030 at the earliest. Many across the industry suggest that a more realistic timetable would run several years beyond this.
• There is a risk that the proposals could undermine high quality but smaller than £25bn commercial Master Trusts that are already investing in line with the government’s priorities.
Laura Myers, Head of DC at LCP, commented: “All of this legislative, regulatory and policy focus on driving towards Mega Funds for UK Master Trusts diverts attention from other measures which could deliver a greater level of productive finance on a much swifter timetable. Ministers now need to be clearer about what it is they want to achieve and to focus legislation on that rather than solely on scale as a proxy. It is also vital that the interests of members are put at front and centre of any reform agenda and not regarding as an afterthought.”
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