Ahead of the Second Reading of the UK government’s Pension Schemes Bill on Monday, investment systems think-tank New Capital Consensus have raised the need to encourage potential new pension ‘superfunds’ into productive assets within the UK economy. 

Broadly praising the Bill in a briefing to MPs, NCC encouraged measures in the Bill to direct the scaled-up superfunds into UK businesses and “productive” assets which benefit both the UK economy and the social conditions for savers themselves. 

The think-tank pointed out the 5,000 small UK DB pension schemes managing £1.2TR of assets as grossly inefficient and welcomed the consolidation of sub-scale funds into superfunds, but urged the need for “smarter, more strategic allocation” once consolidated. 

Other benefits included in the briefing note included the removal of pension liabilities from corporate balance sheets, freeing businesses to focus on growth; and the transfer of portfolios to the Financial Services sector under the mandate of professional allocators. 

Key to the delivery of the government’s growth mission will be the deployment of these allocations to productive assets within the UK. 

NCC raised that Solvency UK, the allocation mechanism brought in to replace the EU’s Solvency II system post-Brexit, directed assets inefficiently and was encouraging “safetyism” within the system that constrains UK growth. A constraint that needs to be removed from superfunds in order to avoid undermining the success of consolidation.

Another potential fetter on growth noted by NCC were wholesale buyouts of employer pension schemes, which they said was constraining the UK economy by depriving it of investment capital. The briefing note claimed that the shift by the bulk of the private DB sector towards buyouts leads to premature derisking, further reducing capital available for productive investment. 

Amongst other measures in the Bill, the think-tank praised the relaxation of regulation on surplus funds in DB schemes allowing employers to use more capital for investment. However, they cautioned that any new corporate profit extraction rules need to be developed in lock-step with Superfund vehicle rules.

Turning to DC schemes, the group pointed out that too many assets are allowing them to rest in “safe” and “unproductive” indices like the MSCI Global Index.

The index currently directs more DC money into Amazon than it does into the entirety of the UK economy on any given day which is damaging investment in productive assets. 

The briefing note concluded with the observation that the average Briton accumulates an average of 11 DC pension pots in the course of a working life and that this atomisation of savings needs to be addressed alongside any major improvements to their drawdown strategies.

NCC welcomed the government’s crucial recognition that DC pensioners are as exposed to as much risk in the decumulation (drawing out) phase of their DC journey as in the accumulation / pot-building phase. 

Chair and Founding Director, Ashok Gupta, said: “The Pension Schemes Bill is a very welcome step towards consolidation for sub-scale DB pension schemes, unlocking greater investment opportunities for businesses and boosting UK growth.

Inefficient allocation of the 78% of pension assets in these occupational schemes is depriving the UK economy of productive capital through premature derisking.  

We know that private DB consolidation is crucial to stimulate UK growth. But we also know that unless life insurers are allowed to set up superfunds outside their Solvency UK ringfences, competition between buyout and superfunds will undermine DB consolidation.”