PLSA asks for six policy, regulatory and fiscal changes to encourage UK growth

The Pensions and Lifetime Savings Association (PLSA) has today published policy recommendations aimed at encouraging further investment by suitable pension schemes in assets which can help drive growth in the UK economy.

With investment in the UK economy a key topic for debate at the PLSA’s Annual Conference in Manchester this week, and after consulting with a wide range of pension providers, policymakers, think tanks and other stakeholders over the summer, the PLSA has today published a new policy position paper on pensions and growth.

It builds on the findings of its June 2023 report, ‘Pensions & Growth: A Paper by the PLSA on Supporting Pension Investment in UK Growth.’

It makes specific policy recommendations to Government in six key areas:

• Pipeline of Assets: Ensure there is 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. These 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 the LTAF. We believe pension funds will be much more likely to invest in UK growth if the Government adopts a strategic and long-term approach to supporting key industries, and key tasks such as the Green Transition to achieve Net Zero by 2050.

• DB Regulation: 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 TPR 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 to protecting member benefits. For example, the regulatory regime should allow pension funds to place more reliance on the support of the sponsoring employer, more flexibility over the discount rate used, and not force schemes to reduce the investment risk they take by aiming to achieve the “low dependency” funding level.

• Taxation: 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.

• Consolidation: The Government should prioritise the passage of a Bill through Parliament to establish a secure and 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. Measures to encourage the consolidation of LGPS (England and Wales) assets into the eight asset pools must only take place where the pools can offer the right investment products and it should be done at a pace that protects the value of the contributions paid in by employers and employees. The Government should continue with its planned programme of action to encourage the consolidation of DC schemes, notably through the use of Value for Money tests.

• Market for DC Under Automatic Enrolment: The operation of the market in which employers and trustees select their DC pension funds 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. Often, this lower cost is achieved by adopting a simpler, less sophisticated investment strategy. In addition to action already being taken by the Government on introducing a Value for Money test, we believe the advice by corporate IFAs and Investment Consultants to employers on pension schemes should focus on net performance rather than cost and be aligned with achieving the long-term interest of savers.

• Raising Pension Contributions: The UK must increase the flow of assets into pensions by gradually increasing the level of pension 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%; we 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.

Nigel Peaple, Director Policy & Advocacy, PLSA, said: “Since early 2023 there has been considerable discussion by politicians, think tanks and the media on whether and how pension funds can be encouraged to invest more in the UK economy, especially regarding companies with the potential for very high growth, albeit usually also at high risk.

“While it is imperative that pension schemes’ freedom to invest in the best interests of their members, however they see fit, is protected, the PLSA has worked hard to identify specific policy reforms that could result in further investment in the UK, following the Mansion House reforms in July.

“We have identified six policy, regulatory and fiscal changes that could bring benefits to both pension scheme members and the UK economy, without the need for radical, highly disruptive changes to the operation of the UK retirement savings system.”