DC: Investing for the future

The Productive Finance Working Group has now published its final report: A Roadmap for increasing investment in Productive Finance Investments (bankofengland.co.uk – PDF, opens in a new tab). We welcome the report and the approach taken to try to unlock current barriers, structural and practical, to long term investment, particularly in the DC market. 

This report is timely; for too long, the immature DC market, with limited asset scale and a long tail of subscale schemes, has been overshadowed by the DB market where investment innovation has thrived. That needs to change. Workplace DC assets are expected to grow from £500bn currently to £1trn by 2030 and the DC Master Trust market is poised for significant growth. Scheme asset and organisational scale will create opportunities for greater innovation in DC to be considered.

Consolidation will help to accelerate the process. The DC Master Trust market has reduced from 89 schemes before authorisation, to 36 schemes currently and a further reduction is expected via consolidation. The number of workplace DC schemes with more than 12 members has reduced from 4,560 in 2010 to 1,560 at 1 January 2021 and that number is also expected to reduce as consolidation, to achieve scale and enable better outcomes to be delivered for members, continues.

While the development of the AE market since its launch in 2012 has been a significant success in ensuring more savers are providing for their retirement, more work needs to be done. Too often the focus for employers, MT sponsors and trustees appears to have been on cost, with the lowest cost often having been the key determinant for implementation. Saver outcomes need to be the focus for trustee decisions and the advice that they receive from their advisers.

Investment in productive finance refers to investment that expands productive capacity. Examples of this include plant and equipment (which can help businesses achieve scale), research and development (which improves the knowledge economy), technologies (for example, green technology) and infrastructure and unlisted equities related to these sectors. An underlying theme of the Working Group’s report is that investment in productive finance assets can help real growth in the UK economy and, in particular, can help to accelerate the recovery from the longer-term impacts of covid. While that theme might resonate with trustees, ultimately trustees have fiduciary duties, and they should only invest in any asset if they believe that investment is in the best interests of their members. They should also take appropriate advice.

Innovation is key in DC

Consultants have helped to drive investment and risk management innovation in the DB market over many years. Regrettably, the DC market has not yet benefitted from the same level of innovation. Lack of individual DC scheme asset scale, fragmented and sub scale DC pension schemes, lack of sufficient scope within scheme governance budgets and the wider industry focus on inputs (costs) rather than outputs (saver outcomes) may all have contributed to that lack of progress. That needs to change. We believe that trustees, consultants and investment managers need to actively engage on these issues to help to drive that change and to help accelerate the transfer of DB skills and innovation to the DC market.

The creation of a Long Term Asset Fund was originally proposed by the Investment Association in June 2019. As part of the work of the Productive Finance Working Group, the FCA have moved that proposal from the concept phase through to the creation of a new type of investment vehicle, which they consulted on earlier in the summer. We welcome that development as an initiative which has the potential to expand the range of investment opportunities which DC trustees can access. However, as with any investment, implementation is key and trustees need to obtain appropriate advice for their scheme including, for example, on the suitability of the investment and the investment provider.

The Productive Finance Working Group report included 13 recommendations which we support. One of those recommendations directly related to TPR and we will prepare some additional guidance for trustees on investing in illiquid investments. In Q4, we will engage with a range of industry stakeholders to scope out the form and extent of the guidance that might best meet the needs of trustees. We intend to publish that guidance in 2022.

We believe that to move the current industry focus from ‘cost’ to ‘saver outcomes’, a combined effort across industry will be required. We will work with DWP and other parties, as appropriate, as the 13 recommendations in the report are taken forward. We have also recently published a joint paper with the FCA setting out a common framework for the holistic assessment of value for money across DC workplace pension schemes in the accumulation phase.

Trustees and their advisers can have a significant impact on saver outcomes. In setting out a Roadmap and putting in place a structure around that Roadmap to deliver change, we believe that the Productive Finance Working Group will, in time, create an opportunity for trustees to consider investing in a wider set of investments, with fewer barriers to implementation and with the potential to improve saver outcomes.

As these industry developments flow through, we would expect trustees to consider, with their advisers, whether new investment opportunities that arise as a result of these industry developments, would be appropriate for their scheme. We would also expect trustees to be prepared to demonstrate to their members that they have considered the full range of investment opportunities for their scheme, in the context of potential future saver outcomes and not just in the context of (lowest) costs.

Where trustees do not believe that they have either the scheme scale or governance capacity to consider these wider investment opportunities, we would also expect trustees to consider whether consolidation of their scheme into a larger arrangement might offer better opportunities for saver outcomes.


By David Fairs, Executive Director of Regulatory Policy, Analysis and Advice