Policy interventions designed to attract further investment in the UK economy should be part of a long-term strategy with savers at its heart, the Association of British Insurers (ABI) has said, warning the government against rushing "market-shifting changes".

In its report, Investing in our Future: Delivering for Savers and the Economy, the ABI said that while investing in savers' interests can be "entirely compatible" with investing in the UK economy, better outcomes must be the litmus test for any new policies.

In addition to this, the ABI warned that any interventions in how and where pensions are invested need to be well thought through to avoid unintended consequences, such as having too much money, and therefore risk, placed in any specific firm or sector.

Given this, the ABI argued that the government should focus on making the UK a more attractive market for pension schemes, suggesting that by developing further initiatives that use co-investment as an incentive, as seen in the Long-Term Investment for Technology and Science (LIFTS) initiative, the government could create opportunities for pension funds to put more money behind assets that align with its wider policy objectives.

The report also acknowledged that current and recent changes, such as disclosure requirements and the introduction of Long-term Asset Funds (LTAFs) will lead to increased investment in illiquids.

However, the ABI clarified that wider changes, such as the proposed Value for Money (VfM) framework, will take longer to root in.

Indeed, the ABI said that while it is "encouraging" that regulators and government are already shifting focus away from solely being about cost through the recent framework, more work is still needed to shift away from the current “cost is king” culture.

In particular, the ABI suggested that The Pensions Regulator (TPR) should review and update its defined contribution (DC) investment governance guidance to encourage trustees to focus on overall value.

In addition to this, it suggested that both TPR and the Department for Work and Pensions' default fund guidance should incorporate the framework – once finished – to rebalance the focus on costs towards a more value orientated approach.

The report suggested that ending this "cost is king" culture could also be coupled with further ideas to incentivise investment.

However, the ABI clarified that regulation must make it as simple as possible to invest in illiquids, including through Long-Term Asset Funds, noting that there are some areas where improvements could be made.

In particular, it suggested that the FCA work with the industry to ensure its permitted links rules do not constrain firms from making these investments, pointing out that LTAFs currently have "specific uses and restrictions in DC pensions".

The report also outlined a number of long-term recommendations, suggesting that where DB schemes are stressed and buyout is many years away, consideration could be given to a wider role for the PPF to act as a DB master trust.

However, it urged the government to avoid rushing "market-shifting changes" to the structure of pension markets, emphasising that the link with employers must remain and full benefits must be paid to prevent moral hazard.

It stated: "Any expansion of the PPF's role would need to address complex questions of cross-subsidy from other DB schemes, the government's role in underwriting the scheme, the question of benefit reduction/harmonisation, and the issues of moral hazard given this might dissuade employers from seeking full protection for their scheme members via an insurer buyout."

Despite this, the ABI said that further consolidation would be appropriate for the 86 Local Government Pension Funds (LGPS).

More broadly, the ABI argued that a long-term strategy to improve DC savings rates is "desperately" needed, urging the government to press ahead with plans to increase automatic enrolment contributions by removing the lower earnings limit and by lowering the automatic enrolment age from 22 to 18.

ABI director of policy, long-term savings, health and protection, Dr Yvonne Braun, stated: “We have long been campaigning for people to pay attention to their pensions, and we welcome the government’s appetite to increase investment opportunities for pension schemes.

"The purpose of a pension is of course to secure a saver’s standard of living in retirement, so the test for any new policies must be that they deliver better outcomes for pension savers.

“The UK market can be made more attractive for pensions, for example through co-investment from government in certain sectors. It is also crucial that the auto-enrolment pensions market starts to focus on value rather than price.

"But pensions are for the long-term, so any more far-reaching changes need to be part of a long-term strategy that is joined up across government and can command cross-party support. Our industry will continue to proactively engage to help bring about this long-term strategy.”

Adding to this, PensionBee director of public affairs, Becky O’Connor, stressed that "it is not the job of pension savers to bankroll the government’s pet projects", emphasising that it is the job of the industry to preserve and grow the money set aside for pensions.

“While there may be a Venn diagram in which these two objectives overlap and this area is worth exploring, there is also the risk that people’s retirement money is squandered," she stated.

"This could be through inefficient management of projects that turn out to be less profitable than first thought, with gains ending up in the pockets of consultants rather than in savers’ bank accounts in later life.

“Done wrong, there is a risk that this strategy could result in poorer returns for millions of savers. This risk would have to be managed very carefully, with full transparency over what our pension money is being used for, and at what price.

“We are happy with the gist of the ABI’s short and long-term recommendations, which try to steer a course for better outcomes for savers that is focused on incentives to invest, rather than instructions.”

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