Investment innovation and future consolidation for occupational DC pension schemes
The Minister for Pensions and Financial Inclusion, delivered a speech at the Trade Union Congress ‘Fit for the future’ pensions conference on 5 February.
Introduction
Thank you to Paul Nowak.
To misquote Oscar Wilde – to be asked to come to the TUC once is an honour, make it out alive is a great honour, and to return is both honour and to be honest must mean I’m doing something wrong!
[political content]
I am here to discuss 4 things:
- infrastructure investments
- automatic enrolment
- Collective Defined Contributions (CDCs)
- pensions dashboard
Infrastructure investments
When I spoke at this conference last year, I committed to consult on changes to legislation to clarify the fiduciary duties of pension scheme trustees – and specifically their duty to consider any risks which they believe to be financially material.
I gave some examples at the time:
- how well firms are preparing for and acting to limit the risks of climate change
- the treatment of employees by the companies in which they invest
- poor corporate governance and pay awards which are unjustified by results
I kept that specific commitment and pension schemes are getting ready to comply with the regulations that will come into force later this year.
With this change, pension schemes will have clarity about their ability to consider the full range of financial opportunities from investment in green infrastructure, in social housing and in new technology.
We want to take that further. I’ve held a series of stakeholder events over the last year. Last year I mentioned that I wanted to look at how can we enable pension schemes to invest in assets which take account of the bonus that exists from investing for the long term.
I’ve welcomed the Financial Conduct Authority’s recent consultation on broadening the range of investments which may be used as ‘permitted links’, to include assets like infrastructure, venture capital investment in early-stage growth companies, and housing. This will increase the supply of investment opportunities for defined contribution schemes.
However, continuing my department’s work with HM Treasury on Patient Capital in defined contribution pension schemes, I want to stimulate demand for illiquid investments, and help to accelerate the development of scale. I have worked hand in glove with HM Treasury on this; we met only last week to discuss this.
Therefore, this morning, government is publishing a consultation on Investment Innovation and Future Consolidation.
We are now reaching a point where schemes can invest in a broader range of asset classes, whilst remaining within the charge cap. Larger pension schemes could consider opportunities for more innovative, long-term investment offering members the potential for better returns – and the UK economy billions of pounds of funding that can boost jobs, productivity and growth.
I shall be clear – we will not be telling pension scheme trustees how or where to invest. Or what to invest in. But we are asking schemes to consider the benefits. I believe that we are opening doors.
But we can do more to attract new investment into important sectors of the economy which would boost employment and help to build stronger, more sustainable communities. At the same time, this approach I believe would give savers more pride in their pensions while delivering good returns.
This approach will build engagement with pensions. I believe with a greater understanding and comprehension of the way pensions are run, if you understand what you are investing in, you will be more interested in developing your pension.
Therefore, I am proposing to ask the largest defined contribution (DC) pension schemes to report on their policies around illiquid assets and to report annually on their holdings. I want to do this in a light touch way, but I think this simple transparent measure could be the prompt that schemes need to start thinking about the benefits.
There is also a long tail of smaller DC schemes which are struggling to gain scale and deliver best value for their members. Sometimes, especially in the smallest schemes, we have seen very weak governance. My second proposal is therefore to extend the value for members statement to require smaller pension schemes to report triennially on why members would not receive better value in a larger scheme. I want to emphasise again that I am not telling smaller DC schemes to close – but I am suggesting that they think about it, and explain why.
Finally, as trailed at last year’s budget, I am bringing forward a technical measure to permit schemes to pay performance fees – used for many less liquid investments – whilst complying with the charge cap. Let me reassure you – this is not a dilution of member protections. Performance fees will remain subject to the cap, and members must still not pay more than 0.75% over a year. The charge cap is a crucial member protection and we do not intend to weaken it.
These measures do not introduce significant burdens. But they can be the nudges that industry needs to move towards a market landscape which improves outcomes – not only for members, but also for society.
I certainly want this to be the start of a new phase in defined contribution pension investment. This will be in collaboration with HM Treasury’s Patient Capital review. I look forward to hearing your views in response to the consultation, and I hope your views will be positive.
As I previously mentioned - I kept a commitment to give pension scheme trustees clarity about their duties. But I am also interested in pension schemes being given a voice.
When many schemes – especially defined contribution schemes – invest in equities, they invest alongside others in pooled funds. They get to choose the fund and with it the investment manager, but they don’t get to choose how to vote at annual general meetings for the companies’ shares they hold. Those votes are about precisely the things I mentioned earlier – how the firms are preparing for climate change, how they treat employees, how executives are paid. Why can’t the end investors – the trustees, which might include trade union members – cast those votes?
I find this a puzzling situation. I hear that technology is a problem, but if that’s the case we should fix the technology. I hear that asset managers think it’s better to speak with one voice. But I don’t think it’s impossible to communicate that your investors have a diversity of views. I hear that it might even be legally questionable, but if that’s the case why are some investment managers letting some clients vote?
I put those thoughts out there. I would like to hear what pension schemes think. I will then review the situation thereafter.
Automatic enrolment
Automatic enrolment is an area of cross-party collaboration. It is appropriate to talk about Jack Dromey at this point – we meet weekly to discuss pensions, and text too frequently for opposition ministers. We are working together on a host of issues, including automatic enrolment. We do have our disputes on the floor of the House of Commons, but we have no fundamental disagreements on pensions policy.
Automatic enrolment is one of our recent success stories. It was a policy that was thought up under Labour, created under coalition and developed under the Conservatives. Automatic enrolment keeps rolling on. We’ve achieved a dramatic change in the savings behaviour of millions of workers by enabling them to save towards greater security in retirement. I am proud to say that we’re now tantalisingly close to 10 million workers having been automatically enrolled, I’m sure everyone in the room will agree that this is an important landmark that we want to reach and then exceed, and I have every confidence that we will continue to reach new milestones and landmarks on an ongoing basis.
Automatic enrolment is helping those who were historically disadvantaged in terms of workplace pension provision – often women and lower earners – to build up their retirement savings. The number of eligible female employees participating in a workplace pension was over 8.1 million in 2017 compared to over 5.1 million in 2012. Over the same time period, the increase for eligible 22 to 29 year-old employees went from 35% to 79%. Opt-out rates from 2016-17 amongst this group are also lower than for other areas.
Furthermore, automatic enrolment is helping us to equalise workplace pension participation across the workplace. In the private sector numbers of people participating in workplace pension saving has almost doubled, from 40% of eligible women in 2012 to 80% in 2017. This astronomical growth is mirrored in eligible men too, where the percentage saving into a workplace pension in the private sector has grown from 43% to 81% over the same period.
Automatic enrolment is changing the way people behave: they are now savers and this is spilling out into how saving is becoming much more part of our culture. We are seeing a shift in attitude, instead of pensions being something that people recognise as being a good thing, but which they don’t do anything about. It is normalising saving and the belief that ‘people like me are saving’.
Of course people have the option to stop saving towards a pension; however, I am pleased to say that in the majority this is genuinely not occurring. Our 2018 evaluation showed that the first increase in minimum contributions which took place last April has not prompted people to stop saving. Rates of opt-outs from April-June 2018 were 0.7%, compared with 0.6% for the 4-year period before April 2018. It is vital we continue this good trend to enable those traditionally worse off in later life to prepare and plan for the future. This stands us in good stead as we move towards the second increase in contribution rates. Providers have a key role here.
It will not escape those in the room that I have said ‘we’ many times, this has been deliberate. The success of automatic enrolment is one of those rare things – a government policy developed and delivered with a consensus of support, including the TUC.
The TUC have an important role in helping us to communicate that automatic enrolment is a good thing, not just for employees, but for businesses as well. When I worked on the living wage campaign, we found that the campaign was helped to succeed by focusing on the impact of the living wage on productivity and loyalty. In Hexham, in my local coffee shop, the staff walked to work in the snow as they felt like their employer had gone the extra mile for them, so they wanted to go the extra mile for their employer. The coffee shop was the only one open on the street. We must make the case for the advantages of automatic enrolment for businesses. I will leave this with you as a challenge, but it is something that we are working on within the department.
Collective Defined Contribution (CDC)
I will now turn to Collective Defined Contribution. I have got to know Terry Pulinger from CWU and Jon Millidge from Royal Mail very well.
As you will probably be aware, Royal Mail and the Communication Workers Union have for some time been trying to square the circle of how to provide a regular income in retirement, without intolerable burdens, unaffordable costs, and unmanageable risks. In January last year they jointly came to government with their proposals for a new type of collective scheme which would help resolve the issue by sharing risks in new ways and limiting the costs. Since then, there have been several meetings with Jon Millidge, the Chief Governance and Risk Officer at Royal Mail, Terry Pullinger, deputy general secretary for postal at CWU and government officials. I was delighted to launch the CDC consultation on 5 November in North London; it closed on 16 January.
If you want an example of a trade union working with an employer look no further than the CWU and Royal Mail, it is an outstanding example. I am a great fan of trade unions, especially the CWU, a very good and progressive union working with the Royal Mail to get the best for workers.
And with both the employer and workforce at Royal Mail united in their desire to providing this new type of pension, it is right that government is committed to facilitating that.
CDCs are not new. I believe they have the potential to get good outcomes for employers and employees when they work together.
Collective Defined Contribution is not a magic bullet. But CDCs require proper communication in order to be successful. I implore you to go to your local Royal Mail sorting office, chat to posties, get an understanding of the issues – you won’t meet employees that have a greater understanding of pensions. They are engaged with their pensions, and are genuinely interested in the way that CDCs are set up and governed.
We want CDC schemes that are designed, set up and governed appropriately, so that members are not exposed to unreasonable risks. We also want CDC schemes that operate in a clear transparent way, building understanding and confidence in this new type of pension. I know this feeling is one shared by Royal Mail and CWU.
A consultation on our proposed approach has recently closed, and I am pleased that TUC and the wider market in general have responded constructively to that.
If we get all this right, CDC has the potential to open up new avenues for employers and their workforces to develop the best pension arrangement for their individual circumstances.
And I think the positive and constructive way that CWU and Royal Mail have worked is an important lesson to us all about how the best can be achieved for both employees and workforces.
Pensions dashboard
I now turn to talk about another key tool that will be pivotal in ensuring everyone is saving adequately. Pensions dashboards will be an online service which allows people to securely view their information from multiple pensions, including State Pension, in one easy to access place.
Against the backdrop of this changing pensions and employment landscape, we know that people will need a new way to keep track of their pensions and make sense of what this may mean for them in later life. Dashboards are an innovation that will support more informed retirement planning by providing your pensions information online, easily accessible from your smartphone or tablet, giving people unprecedented access to their pension savings data.
We have always been clear that industry is best placed to take the lead in developing dashboards. However, we are also clear that government should play a facilitating role to make this happen. In December, we published our feasibility report and consultation – several members in the audience attended that launch – which set out a route to help industry provide a secure dashboard service for all users. This proposal is supported by consumer organisations such as Which?, and had considerable trade union support.
In order for dashboards to work for our pension savers, they must provide a comprehensive view on people’s pensions. For this reason, government is prepared to legislate to compel schemes to make their data readily connectable to dashboards. We have consulted on the details and we will work with the industry delivery group and the regulators to consider the various impacts and ensure a smooth implementation for schemes of different size and type.
Along with any initiative of this size, the individuals it is intended to serve must always be at the heart of the process. Protecting the information and interests of consumers using any dashboard has always been at the forefront of our minds. To achieve the positive outcomes for people that we envisage, we have also been clear that the design of dashboards must work in the interest of the consumer. The information presented must build and maintain trust, promoting greater clarity for the user.
Last week we concluded our public consultation on our proposals, which we are in the process of evaluating.
The dashboard is an example of creativity, and an initiative that encourages and promotes long term saving. I’m particularly interested in the findings of the NEST Insight Unit and the Sidecar Savings Trial ‘JARS’ which is looking at how people behave when given the option of having a liquid savings product alongside their workplace pension, and how this impacts their financial wellbeing. The sidecar model could, for example, help self-employed to save for later life – while the current trial with the NEST Insight and Timpson’s is not directly focussed on the self-employed the results will be interesting in relation to the wider context of self-employed and pension saving, particularly given there is a reasonably high degree of churn between employment and self-employment among the automatic enrolment target population.
I want to finish on a couple of quick points. I have launched a consultation on defined benefit consolidation, which is currently pending. I do not underestimate the complexity of the legislation in this area, however I do think that the government should be supportive of the critical mass of superfunds. We must learn lessons from other countries, but this is something that the market will progress independently if the government doesn’t shape.
I could give a political speech about employment, state pension age and the Crickland report, life expectancy and other issues, but I will park that for now.
I wanted to do this job – I wanted to help make the UK match-fit for the future. I pushed for the government to create a Minister for Financial Inclusion, and when I was appointed I was lucky enough to have financial inclusion added on to my portfolio. Financial inclusion is critical, and I want you to ask yourself what are you doing in this area for the members and employees that you represent? Are you giving them the degree of financial assistance that you would expect others to give? If you’re not, who will?
I am a champion of the mid-life MOT. We are piloting it in DWP. I ask you to look at the Aviva mid-life MOT trial if you haven’t already done so – it has been utterly transformational.
Finally – if you haven’t piloted and support the concept of sidecar – why not?
Being asked to speak today has been a great privilege and an honour. I’m not sure I’ll be asked back, but I’ll look forward to it if I am. Thank you.