UK DC Exchange 10th anniversary: Where next for pensions?

The future of DC pensions in the next 10 years

The panel hosted by Mary Cahani, Head of DC Clients at Invesco, gave an insight into how these changes will play out in the next 10 years.

“We have been exchanging ideas for over 10 years in DC and there’s still a lot more work to do over the next 10 years,” said Cahani.

What does the future of DC look like?

In the next decade, there’s a lot of change ahead for the DC pension industry. The industry will need to deal with new regulations, consolidation, innovation and how to best provide members with the best value for money. Each will have their own set of challenges.

Collaboration will be key between the industry and government to deal with the changes.

“I think our voice would be louder and better if we all actually worked in concert,” said Alison Leslie, Head of DC Investment at Hymans Robertson. So, what I'd like to see is the ask for the future is a little bit more about collaboration and pulling together.”

What Jesal Mistry, Head of DC Investment Proposition at Legal & General, is finding challenging is the discussion around potentially mandating exposures to UK assets.

“There's a lot of opportunity in the UK to generate very good returns, lots of demands and need for investment,” said Mistry. “There’s a focus around best interest for members, but the focus on making it policy, I’m very sceptical about it. We shouldn’t just be focused on the UK. We don’t have to be.

“They are looking at the Australian market in particular, maybe the Canadian. They are looking at those schemes and a lot of them have lots of private market exposure, a lot of that is home bias. But there's a global element to it as well, for example, Australian pension funds are over here buying the Manchester Airport Group.”

However, Julius Pursaill, Strategic Advisor at NatWest Cushon believed pension funds should be overweight UK as it’s part of the member’s financial interest.

“The standard of social care, healthcare, education, access to green spaces all those affect our members standard of living in retirement,” said Pursaill.

“Why is it that we don't take that into account? We don't take this into account because the guidance that sits around fiduciary duty tells us we need to focus on financial factors.

“Fine! But I have suggested that they are financial factors. The guidance says financial factors as they apply to the size of the fund or the income that fund produces, not what you can buy with the income. We need to focus on the quality of society in which our members are going to retire.”

Are DC pensions value for money?

There was a lot of talk about pension schemes from a value for money perspective and the red, amber, and green ratings.

“Why would you bother if you're going to end up amber or red,” said Mistry. “Even if it's in the interests of members, you only have one year to deliver the returns that puts you in the green mode. That for me is a fundamental problem there's no incentive to do anything more than what everyone else is doing. We could ultimately end up in a herding situation.”

Pursaill agreed and said: “You can’t just have past performance, it’s just very destructive in terms of long-term value creation.”

How do you ensure innovation?

Another big topic was whether the ‘mega funds’ proposal would stifle innovation.

“If you get some of these smaller Master Trusts that have been disruptors and innovators in the market and they are moved out, I think that's quite dangerous,” said Leslie. “Sometimes the bigger you get it's very difficult to move.”

Although Leslie pointed out there were efficiencies to be gained by being big, she believed it’s vital to have small players that can innovative and challenge the industry.

Mistry thought the government were primarily focused on investment innovation. “They want to be able to leverage the scale of the UK pensions industry to be able to support UK projects and growth and are looking in envy towards other countries where home bias is greater,” he said. “It’s our responsibility to make sure that we are able to deliver on the potential upsides of this increased investment, all within the context of continuing to focus on delivering good outcomes for members.”

Webb was worried that being so big might not create a level playing field. “How do you regulate schemes when some of these are going to be quarter of a trillion?” said Webb. “It's not an even playing field. There’re competition laws that try to prevent massive oligopolies of this sort and that's what we're creating by design.”

Over the next 10 years the DC pension market will continue to evolve as the industry adapts to change. “Collaboration will be necessary for the industry to address the challenges that lie ahead,” concluded Cahani. “Regulation is happening at speed. Companies will need to work together, consolidate and innovate to meet the changing needs.”