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UK pension funds must broaden investments, new regulator warns

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UK pension fund trustees must consider increasing the range of their investments, including in start-ups or other illiquid assets, or face “robust” intervention, the British regulator has warned.

Nausicaa Delfas, newly appointed chief executive of The Pensions Regulator, added that it was important for trustees of defined contribution plans to have the expertise to assess more complex assets — and advised that, if they did not, they should look to consolidate or even wind up their schemes.

“Trustees have a duty to savers to act in their best interests. That means properly considering the full range of investment options.”

The remarks, in Delfas’s first media interview since taking up her post in March, come alongside a government push to unlock billions of pounds of cash in public and private sector pensions for investment in British business.

Earlier this month chancellor Jeremy Hunt unveiled a compact with nine of the UK’s largest pension companies and funds to allocate up to 5 per cent of their portfolios to private equity.

Hunt said his “Mansion House” reforms could unlock an additional £75bn for high-growth businesses, while a wider set of reforms to DC pension schemes would increase a typical earner’s pension pot by 12 per cent over the course of a career.

Unlike traditional “defined benefit” pension plans, where retirement income is guaranteed, newer “defined contribution” plans provide no certainty over eventual retirement income, with outcomes largely dependent on investment returns. 

Delfas, who was previously executive director of governance at UK regulator the Financial Conduct Authority, said the DC market was driven by a focus on the cheapest fees rather than overall value, which meant that trustees were not looking at assets that could deliver the best outcomes over the long term.

“We expect that those schemes that have the scale and expertise are able to invest in a diverse range of assets,” she said, adding that “productive finance”, such as illiquid investments, start-ups and growth assets, had a part to play in a diversified portfolio.

“Clearly, some of the more sophisticated investments cost more, but our view is that even now, even within schemes are not actually using the full range of costs (available to them),” said Delfas.

“The challenge of the last decade was how to get people saving. And now the challenge for us is how do we make sure that they get the right value from their savings.”

Some fund trustees expressed concern that the Mansion House pact amounted to ministerial over-reach in their duty to act in members’ best interests, adding that the financial gains from private equity investment had been overstated by the chancellor.

But Delfas defended the pact. “This is a voluntary agreement by the parties and it shows the intent to look at a diverse portfolio of assets.

“We expect DC trustees to look at whether or not they are competent to conduct these kinds of [illiquid] investments and when not, then they should really look to consolidate their scheme or wind it up,” she said.

Ensuring that trustees overseeing investment decisions have the skills to assess more complex assets, and to challenge the advisers who may recommend them is a key issue for the regulator.

The UK gilt market blow-up last September, which was triggered by the disastrous ‘mini’-Budget of then-prime minister Liz Truss, exposed a lack of knowledge of complex investment strategies among some trustee boards. It also revealed shortcomings in the regulator’s assessment of how these strategies were being used by pension funds.

Delfas said she would like to see a professional trustee on every trustee board “but that’s hard to do at the moment with the number of schemes that exist”. 

A core priority for Delfas is accelerating consolidation in the DC market, which is dominated by thousands of smaller schemes, which would see the emergence of bigger and more professionally governed plans.

Data published by the regulator last month showed that only around a quarter (24 per cent) of DC schemes were meeting a requirement to assess value for members, with larger schemes, such as master trusts, more likely to meet it.

“We believe that bigger schemes, with that greater scale and expertise, can deliver greater outcomes,” she said.

“Trustees not doing what we expect can expect us to intervene more robustly, and be more assertive around the need to consolidate if they fail to improve or if they are not meeting regulatory requirements,” she added, warning that “we intend to fully use the powers that we have”.

The regulator can pursue enforcement action against trustees who do not meet their duties and the government is considering whether to extend them to include the forced consolidation of schemes in the most egregious cases. 

Ensuring that investments in areas like private equity, which typically levy performance-based fees, do not erode returns, will be key for trustees. Government analysis published this month showed that typical private equity fees could leave some young pension savers worse off.

Delfas cautioned that trustees would also have to look “carefully” at whether City fund managers could bring down their fees to reduce risks to pension savers.

“My sense is that there needs to be a market solution,” she said. “The value for money framework will provide that lever for competition, and that clarity between schemes and the markets will naturally move.”

Nausicaa Delfas qualified as a solicitor in 1992 and has nearly two decades of experience in senior UK regulatory and enforcement roles in the UK. She joined TPR in March after six months as the Financial Conduct Authority’s executive director of governance. 

Prior to that she was chief executive and interim chief ombudsman of the Financial Ombudsman Service, clearing its backlogs and spearheading its strategic, operational and digital transformation.

She has held a variety of other senior positions in the FCA and its predecessor, the Financial Services Authority, including chief operating officer and executive director, international, in which she led the regulator’s international and post-Brexit strategy.

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