State of U.K. market gets hard look at conference

Reinvention was the overarching theme of the Pensions and Lifetime Savings Association's annual conference, as delegates and experts came together to discuss the major issues affecting the retirement industry.

Delegates gathered in Liverpool, England, to hear about the association's work in reinventing defined benefit funds through its own task force, which unveiled its interim report. The reinvention of Europe following the U.K.'s vote to leave the European Union was a topic mentioned in almost every session across the three-day conference. And the reinvention of multiple-employer defined contribution plans — known as master trusts — was a key issue discussed throughout the conference.

The issue of DB fund deficits in the U.K. has worked its way back into the headlines over the past few months, with companies revealing their struggles with funding shortfalls. The PLSA's DB task force, launched in March to consider solutions to the problems that defined benefit funds and their sponsoring employers face, presented its interim report Oct. 20.

Launching the report and talking through its findings, Ashok Gupta, chairman of the task force, said: “Lest we forget, DB is still an enormous force for huge social and economic good. And it matters enormously today and it will continue to matter for decades to come.” He said DB is a “key provider to capital markets, and through capital markets to the U.K. economy. The sector invests £1.5 trillion ($1.8 trillion), a figure that has doubled over the last decade. It owns 80% of the U.K. index-linked gilt market. It is a big owner of U.K. infrastructure, a growing owner of U.K. infrastructure, and wants to own more. And a well-functioning DB sector is a crucial driver for all parts of the U.K. economy.”

Mr. Gupta said the task force concluded the DB system is “not working as it should — the sector has problems.” But the industry needs to reinvent the way it thinks about these issues. “(These are) not problems you can understand just by looking at deficit numbers — big and scary and wildly fluctuating as they may be. We believe you have to start from what really matters — the risk to members' benefits,” he said.

The DB picture was affected negatively by Brexit, and the outcome of the vote and reinvention of the U.K.'s relationship with the European Union was addressed by Pascal Lamy, former director-general of the World Trade Organization.

“What could have been soft Brexit, sort of Swiss-like, Norwegian-like arrangement,” has given way to a hard Brexit scenario, Mr. Lamy said. He cited a “good friend” of his who “once said the difference between belonging to the union and soft Brexit is, if you belong to the union you have got one foot in and one foot out … soft Brexit would be one foot out and one foot in — and that is a big difference.”

Mr. Lamy said the potential loss of passporting — the ability to market investment strategies across European borders — through a hard Brexit will harm the City of London, and this is why “Frankfurt, Milan, Dublin and even Paris” have started to compete for business. He cited a campaign to pull business into Paris, encouraging the financial sector to “Try the Frogs, which I think is a reasonably British way for the French to put their case in order to promote Paris.”

Mr. Lamy concluded that this is a reinvention of the relationship between economics and politics. “After decades of economics and politics interacting with each other in a way that economic rationality at the end of the day would trump political irrationality … this has changed. We are in a period where politics, geopolitics, trump economics and geo-economics.” While these are interesting times, Mr. Lamy said that for the PLSA audience, it “creates a lot of uncertainties – so good luck, because you will need a lot of brain juice to adjust to that.”

A lot of brain capacity was also needed for discussions around the reinvention of the DC landscape. Changes to the master trust market were flagged by Richard Harrington, undersecretary of state for pensions, in his Oct. 19 presentation. He said a bill had been presented to Parliament that day, addressing issues around master trusts, and that there cannot be a "situation where parts of pensions are more regulated than others."

The government published its Pension Schemes Bill on Oct. 20, with changes including a move for stronger regulation of master trusts, capital adequacy rules and increased powers for the U.K.'s Pensions Regulator. The bill was largely welcomed by delegates at the conference, although some warned that the changes — which were largely viewed as something that will “flush out” master trust providers that are not up to scratch — will require work by the industry to ensure participants are not adversely affected, and that the regulator's resources are beefed up.

The PLSA, which went through a reinvention last year when it rebranded from the National Association of Pension Funds to ensure it kept up with the changing retirement landscape, is undergoing its own assessment. The association is reviewing its internal governance, ensuring it is well placed to continue to act on behalf of its members.

Joanne Segars, CEO of the PLSA, also revealed that she had convened a Brexit task force, ensuring that the association knows what a successful Brexit looks like from a retirement perspective. Announcing the task force in a speech Oct. 20, Ms. Segars also called for change to the relationship between retirement plans and the companies in which they invest. “It's essential that pension funds know more about how the companies in which they invest manage and engage their workforces ... we know that engaged workers make for stronger companies, and make for better investment returns.”

The association is therefore calling on companies and corporations to provide more information to retirement plans and other investors about their workforce, such as diversity and pay ratios.