Pension reforms may increase investment returns

Greater use of collective pension vehicles could improve saver outcomes and unlock more long-term productive investment in the UK, according to New Capital Consensus (NCC). The think tank argued that the systematic transfer of investment risk from institutions to individuals over the past 25 years has contributed to more short-term and risk-averse investment.

The decline of with-profits, deposit-administration and other guarantee-rich products has shifted the “risk burden” towards individual savers, says NCC. Defined contribution (DC) savers now typically bear investment, longevity and residual risk themselves, often without financial advice.

NCC suggested that greater use of investment vehicles that pool risk and share both the potential benefits and downsides of long-term investment could help reverse this trend. The think tank called for greater support for collective defined contribution (CDC) schemes, which pool investment and longevity risks across members.

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NCC also argued that pension superfunds should be encouraged in the defined benefit (DB) market. These vehicles bring together smaller employer-sponsored schemes into larger funds backed by dedicated capital buffers, allowing for more efficient risk management.

According to NCC, mark-to-market accounting requirements and daily liquidity expectations can undermine pension funds’ long-term investment capacity. By using pension superfunds, these constraints can be mitigated, and more long-term investments can be made.

NCC policy director and report author, Dan Hedley, said the range of products available to savers had been “systematically stripped of its collective risk-bearing capabilities” over the past 25 years. He argued that treating DC pensions primarily as savings pots, rather than as vehicles for providing an income throughout retirement, also created risks for savers.

Hedley emphasized the need to improve the vehicles available to savers, which can pool risk with others and share both the risks and rewards. This would allow for more appropriate risk-taking and potentially higher returns.

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NCC director, Ashok Gupta, described risk-bearing as a “valuable activity”, noting that while excessive concentrations of risk could create dangers, the aim should be to manage risk rather than remove it from the investment system. He warned that the UK’s ability to pool risk and share collective risk and reward had “dramatically reduced” in recent decades.

The report highlights the need for a more sustainable and equitable pension system. By promoting collective pension vehicles and pension superfunds, the UK can unlock more long-term productive investment and improve saver outcomes.

With the right vehicles in place, savers can benefit from more stable returns, and the UK can unlock more long-term productive investment.