The Pensions and Lifetime Savings Association (PLSA) has set out some far-reaching recommendations aimed at boosting pension investment in assets which can help drive growth in the UK economy.
With investment in the UK economy a key point of debate at the PLSA’s annual conference in Manchester this week, and after consulting with a range of pensions and other stakeholders during the summer, the PLSA published a new paper addressing the hot topic of pensions and growth.
It makes major recommendations to the government in six key areas.
The first is headlined: The Pipeline of Assets. Here the PLSA makes the obvious point that there needs to be a stream of high-quality investment assets suitable for pension fund needs.
“The British Business Bank should be given the task of identifying and providing UK productive finance assets that achieve the right risk-return characteristics and low cost needed by pension funds,” the paper states.
These, the PLSA noted, should not only include unlisted equities but also other illiquid assets, such as unlisted debt and infrastructure. The government should also support action by the asset management industry in providing suitable growth funds or investment vehicles, such as long-term asset funds (LTAFs).
The second point concerns addressing DB regulation. The PLSA recommends that the funding regulations that apply to DB pension funds should be amended to provide greater flexibility over their investments.
In particular, DWP regulations, and the related The Pensions Regulator’s DB Funding Code should allow open DB pension funds, and closed DB pension funds with long investment time horizons, to take “more investment risk” where, “this is appropriate”.
Third concerns taxation. The PLSA says fiscal incentives should be introduced that make investing in UK growth more attractive than competing assets.
“We would like the chancellor to make the following changes: allow tax free dividends on investment by pension funds in UK companies, and provide additional tax incentives, like the LIFTS initiative, in UK start-ups and companies requiring late-stage growth capital,” read the PLSA’s paper.
Four is on market consolidation. The PLSA says the government should prioritise the passage of a bill through Parliament to establish a statutory regime which will enable the growth of DB superfunds.
It should also take “other action necessary” to support the consolidation of assets in DB master trusts and with insurers through buyout and buy-in contracts.
In addition, measures to encourage the consolidation of LGPS assets into the eight asset pools must only take place where the pools can offer the right investment products and done “at a pace that protects the value of the contributions” paid in by employers and employees.
The fifth point addresses the market for DC under automatic enrolment. Here the PLSA recommends the operation of the market for automatic enrolment purposes “must be reformed” so that there is less focus on cost and more on performance.
Currently, a mandate can be lost due to a difference in annual charges of only a few fractions of a percentage point.
That last point addresses raising pension contributions.
There must be an increase in the flow of assets into pensions, said the PLSA, by increasing the level of contributions under automatic enrolment “from today’s 8% of a band of earnings to 12% of all earnings starting in the mid-2020s and finishing in the early 2030s.”
Today, employers only pay 3% while employees pay 5%. The PLSA believe this should be equalised, so that each pays 6%.
“Raising automatic enrolment contributions in this way will provide a deep and lasting pool of investment assets for decades to come,” the PLSA added.