Industry guidance could support UK pensions investment plans, say experts

Pinsent Masons included this proposal in its formal response to a government consultation that closed on Thursday, which relates to its ongoing pensions investment review.

One of the central missions of the UK government is to kickstart economic growth. However, with tight fiscal constraints, the government is looking to the private sector to deliver much of the investment required to support its growth agenda.

As part of that plan, the government is exploring ways to drive consolidation of defined contribution (DC) pension schemes and assets to deliver greater scale, and in tandem encourage the deployment of that pensions capital to support the UK economy. It set out proposals to that effect in November 2024.

“In terms of the diversity of investment that operating at scale allows, there is evidence that infrastructure and private equity are asset classes that may have relatively high impact on economic growth,” the government said in its consultation paper. It is considering, among other things, stipulating a “minimum size” of assets under management by multi-employer defined contribution (DC) pension schemes and capping the number of default fund arrangements scheme providers can put in place – to give greater scope for retirement savings to be invested in assets classes that can enable higher growth, like infrastructure and private equity.

However, while the government has said the proposed new measures would be accompanied by “the highest levels of protections for savers”, there has been concern raised within the pensions industry over how enabling the government’s “productive finance” plans fit with such things as fiduciary duties.

Pensions expert Tom Barton of Pinsent Masons said the government may be able to achieve its policy objectives in a different way from that proposed – or at least in part.

“Uncertainty as to whether proposed scale will be required at scheme, default arrangement or default fund level has been called out by many responses,” Barton said. “Whatever the case, scale may not be a solution of itself. To help governance bodies and providers get comfortable that productive finance investments remain aligned with fiduciary and other duties that relate to investment, the government could provide the same sort of materials that have helped make ESG investment a success.”

When governance bodies and providers were being encouraged to consider ESG investment, this was accompanied by a review of fiduciary duties and materials were made available to show the benefit to pension savers. In its consultation response, Pinsent Masons said this “helped accelerate the move to ESG-aligned investments”.

According to Barton, this new guidance, when coupled with the new ‘value for money’ framework for DC schemes, “might go a large part of the way to achieving policy objectives – without disrupting the workplace pensions market and a fairly well-developed process of transferring assets from sub-scale or employer-run schemes to scale schemes, often master trusts”. He added: “This could be instead of or alongside scale targets, which may need some flexibility baked in to accommodate differences across the market and the possibility of new entrants.”

Pinsent Masons has backed other proposals in the government’s consultation that would give pension providers scope to unilaterally trigger pension transfers, without the need for the consent from individual savers under the scheme, “to improve outcomes for pension savers”. The exercise of such “contractual overrides” would be subject to “conditions and appropriate protections” outlined by the Financial Conduct Authority (FCA) and/or the Pensions Regulator, the government said.

Barton said: “We generally think it is sensible to have a mechanism to allow for unilateral activity by providers where appropriate. This would supplement existing options such as schemes of arrangement and, of course, exercising unilateral rights which already exist within contracts and rules for personal pension schemes.”

“It may that transfer will not always be the optimal solution – so some flexibility could be baked into the system to accommodate other changes within the same scheme or product. To promote consumer safeguards, we also suggest some flexibility for sign off by independent experts or internal governance committees as appropriate to the circumstances,” he added.

Barton said potential tensions between the operation of a new contractual override mechanism and the consumer duty in effect in UK financial services would need to be addressed, however.

“To make sure there is no tension between a transfer, or change, mechanism and the consumer duty or unfair contract terms regime, we would need legislative and regulatory clarity as to whether the mechanism could come into play where there is no detriment at all, for any policyholder – or whether this can be considered ‘on balance’ as it sometimes is in occupational pension schemes,” Barton said.

Further government plans laid out in its consultation seek to impose a new legal duty on employers to “conduct a self-assessment of their pension arrangement against specified criteria, that is the relative investment returns, charges and quality of the arrangement relative to comparable arrangements”.  That proposal is designed to encourage employers to focus more on value than cost when selecting pension arrangements for their employees – a focus it says means lower-cost default arrangements are often favoured above “diversified investment strategies which ultimately deliver improved member outcomes”.

Pinsent Masons has urged caution over imposing such a new duty on employers.

Barton said: “We are not convinced that now making increased legal and regulatory obligations on employers will be an effective solution in practice. It may be better to develop best practice positions which can be adopted (or not) by employers. A formal duty might even give rise to additional liability on employers as has been seen in the US in relation to 401k plans, and the raft of multi-million lawsuits against employers for breach of such associated employer duties.”

“It comes back to the point that industry may need government help to get comfortable that investments remain aligned with fiduciary and other duties that relate to investment,” he said.