Panellists speaking at AXA Investment Managers’ DB scheme options event this week said the UK’s defined benefit (DB) scheme has the potential to implement and fund the government’s productive fiscal policy. He said incentives were needed.
Panelists highlighted that there is currently no incentive for schemes to invest using “large amounts of risky assets”.
Back in July, UK Chancellor of the Exchequer Jeremy Hunt announced plans to unlock up to £75bn of additional investment from pension schemes to support growth in the UK economy and benefit savers. This includes encouraging plans to invest more assets in productive finance.
But while there’s a lot of talk about returns at the moment, there’s less talk about managing the risks associated with those investments, says Payam Kazemian, client director at Zedra Governance.
“The government is talking about a pension scheme that invests in UK productive assets, but this is largely an employer-led decision,” he said.
He said that from an employer’s perspective, if a scheme is well-funded or very well-funded, the employer is effectively taking on the risk if the scheme fails to achieve this. He explained that the employer would have to pay the shortfall.
He added that the current framework “doesn’t really encourage anyone to take that risk.”
“There needs to be some structure and incentive, whether it’s tax incentives or a structural setup where the government upholds some of the terms of the system,” he said.
Mr Kazemian said this would protect the scheme from having to pay out deficits arising from this type of investment. He added that government guarantees could lead employers and trustees to believe that they can do so safely and support government policies in the long term.
He added: “But as things stand, there is no incentive for the trustees.”
James Brundrett, senior investment consultant at Mercer, said insurance schemes now had a “great opportunity” to seek insurance deals, but added that the Mansion House reform highlighted alternatives. .
Sponsors “have a lot of options,” Brundrett said.
He agreed with Mr Kazemian that tax incentives were some of the “good ideas” on the market to help implement the scheme, but ultimately it was in the best interests of members. He said it was important to prioritize.
Maria Johannessen, head of UK investments at Aon, admitted that it is difficult to see what the incentives will be at the moment, but with a “little imagination” it is clear that there is an incentive for trustees to implement the plan. He said that there is.
She said: “It’s clear that discretionary pension benefits can be avoided. From an employer’s perspective, the return of surplus money, the possibility of funding benefits, everything is there. [While] Although not as structured as an insurance transaction, options exist. ”
Like other panelists, Johannessen said these could be strengthened through tax incentives and the possibility of simplifying the bill.
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