Investing for a pension is often the only and largest investment people make. Savers rely on the pension system working as hard as it can to deliver the best possible retirement income.
We believe this is best achieved by having fewer, larger, well run schemes. That is why we welcome the government’s new package of pensions measures.
We support innovation in savers’ interests and believe widening the opportunities for collective defined contribution schemes and the introduction of a statutory regime for defined benefit (DB) superfunds can help bring about schemes with better governance and scale to achieve good outcomes.
But in addition to new models, there needs to be a fundamental mindset shift throughout the pensions industry:
- Sophisticated investment governance practices.
- The scale to drive efficiency.
- And highly qualified trustees challenging advisers to make sure all savers get the best possible pensions.
In DB this means ensuring delivery of the benefit commitment made to savers. In DC schemes, it means a move away from a focus on low costs to a laser-like focus on value.
The new Value for Money framework will enshrine this in legislation, driving effective competition on metrics that really matter for savers.
We already know that investment returns are a strong determinant of DC pot value. For a young person with a DC pension, even a small difference in returns could mean tens of thousands of extra pounds in retirement. Just as taking too much risk puts savers’ pots in jeopardy, over-investing in low-risk, low return assets could end up depriving them of much needed retirement income. The key is achieving the right balance through investing in a properly diversified portfolio.
Trustees need to make sure that savers’ money works for them. And that doesn’t mean avoiding risk but taking the appropriate level of risk to secure the right outcomes for their members.
In both DB and DC schemes, trustees have a duty to savers to act in their best interests. That means working hard to deliver the retirement income that savers expect, including properly considering the full range of investment options.
Trustees should be conscious of and manage risks, but also take advantage of new opportunities – putting in place the right advisers and challenging them to present them with well thought out and innovative offers which enable them to invest in the interests of savers.
The regulatory system has flexibility to let them do this, and many trustees do.
Productive finance of course has a part to play in a diversified portfolio and new ways to access these opportunities are becoming available to trustees, such as Long Term Asset Funds.
That is why we will soon update our DC guidance to reflect new duties on trustees to report on their policy on illiquid investments and to support trustees to make well-informed decisions. In the autumn, we will provide new guidance on investing in productive finance and update our existing investment guidance for DB and DC schemes. Our new DB funding code will also clarify where DB schemes are able to accommodate investment in growth assets, particularly for open and immature schemes.
TPR’s core focus is on ensuring schemes are well run and have sufficient scale to deliver good outcomes for savers. As a regulator, we will be scrutinising and challenging trustees on the decisions they are making and how they are designed to deliver the right retirement outcomes for savers.
Where trustees do not have the scale, expertise, or appetite to meet our challenge and truly deliver for savers — then it is time to consolidate and move their savers into a scheme that can.
Savers deserve nothing less.
By Nausicaa Delfas, Chief Executive of The Pensions Regulator