The Department for Work and Pensions is considering how to direct some of the £60bn held in defined contribution pension schemes into alternative illiquid investments to boost the UK economy.
In a 45-page consultation launched today, entitled 'Investment Innovation and Future Consolidation', Guy Opperman, minister for Pensions and Financial Inclusion, asked the pension industry to consider how DC assets could be funnelled into sectors such as housing, green energy and small and medium-sized businesses.
Mr Opperman said pension assets should be invested in an "appropriate" manner to produce the best return for the member, but this very principle meant there should be more diversification of portfolios.
The consultation follows the announcement in the last Budget that the Chancellor was to allow DC schemes to invest in British businesses under the patient capital initiative.
Currently, DC schemes have little choice outside listed equity and bond funds, many of which are managed on a passive basis.
Mr Opperman said: "We can do more to attract new investment into important sectors of the economy which would boost employment and help to build stronger, more sustainable communities.
"At the same time, this approach would give savers more pride in their pensions while delivering good returns."
Mr Opperman proposed hastening the consolidation of thousands of small schemes – the average DC scheme size in the UK is around £48m - to enable economies of scale and increase financial might that would broaden the asset set available to them.
He said DC funds in the Netherlands and Australia, which were much bigger due, in part, to consolidation, had a history of buying illiquid infrastructure assets, something DC investors in the UK did not.
Tom Selby, senior analyst at AJ Bell, said the government "clearly" wanted to "mobilise £60bn of pension money to boost investment in UK Plc", but added that trustees would have to take "a dispassionate view as they develop and review investment strategies".
The consultation drew attention to HM Treasury’s Patient Capital Review, which launched in 2016 and looked at the availability of long-term finance for growing innovative firms.
So far there has been little movement on the initiative from DC pensions.
Within today’s consultation document, the DWP asked the industry to consider how performance fees on illiquid assets would sit within the government’s charge cap structure for default funds and what might need to be amended.
Mr Opperman said performance fees would not be removed from the scope of the cap nor would protections for members be reduced.
He said: "Most pension schemes charge well within the charge cap and have ample opportunity to diversify beyond listed equities and bonds.
"I recognise, however, that the current methods of assessing charge cap compliance permit only the narrowest range of performance fees."
Mr Selby at AJ Bell said the idea of incorporating complex and potentially value-eroding performance fees within the charge cap would inevitably set alarm bells ringing, but the important thing was the amount that ultimately left members’ accounts.
He said: "The fact the cap itself will remain at 0.75 per cent regardless of the charging structure used should help ensure savers who are defaulted into a fund continue to benefit from a degree of protection.
"However, one of the best ways to maximise investment returns for members is to keep costs and charges as low as possible. As funds grow in size, in theory, their costs should reduce and that saving should then be passed on to the end investor."
The consultation closes on April 1.
