The Pensions and Lifetime Savings Association (PLSA) has told the government that it should not direct the investment of defined benefit (DB) pension funds and should instead allow trustees to invest in assets that meet a scheme's risk-return characteristics and offer appropriate diversification.

In a policy paper unveiled at PLSA’s Annual Conference 2023, the body called on the government and regulators to give DB schemes the freedom to take on more investment risk so that they can invest in assets that can promote growth in the UK economy.

Specifically, the PLSA called on the government to allow larger open and closed DB funds with long investment time horizons to take more investment risk, where appropriate, to protect member benefits.

This can be done by allowing pension funds to place more reliance on the support of their sponsoring employers and giving them more flexibility over the discount rate that they use.

At the same time, they should not be shoehorned into a the “low dependency” funding level outlined in The Pensions Regulator's (TPR) DB Funding Code, which forces trustees to veer towards very low risk investments.

The PLSA also said that fiscal incentives should be introduced that make investing in the UK more attractive than competing foreign 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 [The Long-term Investment For Technology and Science] initiative, in UK start-ups and companies requiring late-stage growth capital," the paper explained.

In addition, the paper argued that The British Business Bank should "identify and provide" assets that achieve the "right" risk-return characteristics and low cost needed by pension funds.

These, according to the paper, 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 [Long Term Asset Fund]," the PLSA said.

This, it explained, will allow smaller schemes to access potentially high-growth investments.

Equally, a more strategic and long-term approach to supporting key industries, and key tasks such as the journey to achieve net zero by 2050, should be adopted by ministers.

On the defined contribution (DC) side of the equation, the PLSA has urged for reform of scheme selection, so that employers and trustees do not automatically opt for cheaper schemes over ones that can deliver higher performance.

Currently, the paper stated, a mandate can be lost "due to a difference in annual charges of only a few fractions of a percentage point".

In many cases, this lower cost is achieved by adopting a simpler, less sophisticated investment strategy. If provided with appropriate advice by corporate IFAs and investment consultants, however, the PLSA believes companies can focus on net-performance rather than cost, while remaining aligned with achieving the long-term interest of savers.

This way, more employers can provide employees with schemes that invest in higher growth asset classes.

More DC investment choice must also be accompanied by higher contributions, adds the paper.

The PLSA said the United Kingdom must also increase the flow of assets into pensions by gradually increasing the level of pension contributions under automatic enrolment to 12 per cent of all earnings, starting in the mid-2020s and finishing in the early 2030s.

Raising automatic enrolment contributions in this way will provide a deep and lasting pool of investment assets for decades to come, it suggested.

Commenting on the report, PLSA director of policy and advocacy, Nigel Peaple, said that since early 2023 there has been considerable discussion by politicians 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.

In order to allow this to happen he said 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," he continued.

“We have identified 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.”

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