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British pension managers have opposed a government plan to force the creation of a series of “mega funds”, arguing it could stifle competition and reduce investment returns.
Fund managers say the government could prevent new market entry by applying an “arbitrary” size test to pension funds, potentially forcing some funds to merge with underperforming peers. argue that the focus should be on optimizing value for savers.
The criticism comes after the government announced last year that defined contribution (DC) workplace pension schemes should be merged to reach at least £25bn of assets per fund by 2030. Ministers hope this will boost investment in Britain’s infrastructure and fast-growing businesses. Reduce fund operating costs.
However, industry observers have warned of unintended consequences from applying the size test and are skeptical that the government’s goals of improving fund performance and increasing investment in domestic assets will be achieved.
“We obviously support economies of scale, but what we don’t want is to create oligopolies. . . . We believe that what is being proposed will hurt competition and innovation and that we will I’m concerned that it will end up like the utility market as we know it, which has a lot of problems,” said Jamie Faibash, chief executive of Smart Pensions, one of the most powerful investment firms. said the investment manager. Acquired DC pension system.
There are currently around 60 multi-employer DC pension schemes in the UK, with total assets expected to reach £800bn by the end of 2020. In a consultation due to end later this week, the government said its proposals would result in a “much smaller number” of schemes.
However, pension managers say that the UK’s defined contribution funds (estimated to have around 4% of assets in private equity and infrastructure) and the much larger Australia’s super with 13% of total assets. It questions the government’s method of comparing pension funds. Two asset classes.
“The Australian system has taken years to carefully select opportunities and evolve its structure. . . . You don’t get the economies of scale by just crushing people and saying ‘it’ll work’.” said Steve Charlton, managing director of SEI Institutional Group, which runs a master trust with around £4bn of assets.
Some smaller master trusts already have high exposure to private equity and infrastructure assets. Around a quarter of TPT’s £4bn DC pension assets are invested in private markets, while NatWest’s Action, which has £3bn assets, has a default strategy targeting a 15% allocation to private markets. .
“We’re skeptical that once you hit any of these scale bars, the level of productive investment will automatically rise…If that’s the government’s objective, then the government should focus on that. ” said Ruari Grant, policy leader at the Pensions and Lifetime Savings Association trade group.
Mr Grant said the proposals have already had an impact on the market, with some advisers removing smaller schemes from their list of recommendations to employers on the grounds that they may not meet the government’s size test in the future. He warned that he was giving.
“We’ve seen situations where the best performers are ignored in favor of those chosen based on size,” said SEI’s Charlton. “Advisors may be satisfied with mediocrity.”
Over the past five years, many smaller pension master trusts, which may struggle to meet government size tests, have been found to be more risky than their larger peers, according to a study by trade magazine Corporate Advisor. The adjusted performance has been shown to be excellent.
“We don’t think having blanket hurdles at a certain level is the right way to go. Even so, we advocate a gradual introduction so people don’t leave the market unnecessarily. ” said Nigel Ashton, Head of Market Development. At Aon DC Solutions.
Analysts have also warned that the 2030 deadline is too hard, as the merger plan will take several years.
“We are concerned about the pace… We need an 18-month to two-year runway[to integrate plans]…Employers will be making decisions about pension providers almost immediately after this announcement. ” said TPT CEO David Lane.
The Department for Work and Pensions said it had set out proposals to “move into a market for larger, better-run schemes to drive growth and deliver better outcomes for savers”, but: We will consider appropriate measures.”
