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DB pensions are on the move but what is the destination in 2024?

For a pensions market that is all but closed to new members, defined benefit (DB) pension schemes and perhaps primarily the Government, are not resting on their laurels. Mansion House reforms and a gently encouraged move into productive assets, increasing numbers of bulk annuity deals, and consolidation, all set against the backdrop of the upcoming General Election, mean that 2024 is set to be a year with many twists and turns.

November’s Autumn Statement saw the Government pledge to make far-reaching reforms to the pensions industry; how savers build a pension pot, driving greater consolidation, encouraging investment in productive finance and accessing surplus cash. The potential impact of these measures could be significant.

In particular, we see the move to encourage more investment in UK productive assets as laudable. We have long been proponents of such assets – especially in sustainable and impactful ones, e.g. social housing. However, these illiquid assets have characteristics that aren’t always aligned with the DB scheme agenda. Due to the acceleration of endgame decisions, DB schemes have a reluctance to commit to the time horizons that these types of investments need. This is primarily because insurers focus their investment on low-risk bonds, with illiquid/productive assets not fitting within an insurer’s investment appetite to any material extent, either due to regulation or preference.

From our calculations, we could see as much as £500 billion of assets being transferred from DB schemes to a handful of insurance firms in the coming years. The Government, PRA and the Bank of England should be asking questions on the long-term economic implications of this shift and alongside the economic impact, they should consider the regulatory ramifications. Have steps been taken to ensure the insurance regulatory landscape is equipped to handle this influx of capital and its associated risks?

Another area is for the Government to destigmatise run-on solutions. This will promote a range of investment decisions in UK companies and greater flexibility on which illiquid assets meet the definition of growth companies to give insurers and the industry confidence when considering risk and liability in the context of investment decisions.

Inspiration from other markets

In our view, the debate also doesn’t need to focus solely on private pension funds. Instead, we could look at how public sector and state pensions are funded. The Government could establish a public sector superfund to invest in a range of assets, including productive finance, with its returns ringfenced to (partially) fund public sector pensions and potentially the state pension.

This would not be unprecedented. Across the Nordics, Canada and Australia, public sector superfunds invest in productive assets, such as large infrastructure projects. This provides revenue for Government to fund spending commitments, including state pensions. It would be much easier for Government to mandate a minimum exposure to UK productive assets for a state or public pension fund rather than corporate funds.

Solutions abound

While the road ahead for UK pensions is uncertain, there is real potential for the industry to engage with policymakers for the benefit of the economy and long-term member outcomes.

We should encourage greater investment in illiquids with greater flexibility in terms of their eligibility, creating a standardised approach to move assets from DB schemes to bulk annuities.

We can remove pressure on the insurance market and destigmatise run-on to encourage other alternatives to buyout. And with inspiration from other countries which have done so successfully, a long-term aspiration should be the creation of a new pensions superfund to invest assets for the currently unfunded public and state pensions.

For a long time the UK’s DB pension regime has worked incredibly effectively to prioritise delivering members’ benefits and we will continue to do so.