By Graham Vidler
Change has been a prevalent theme in recent years, not just on the global and political stage, but also in business, pensions and for savers.
Those who attended our Annual Conference in Manchester last month will know chief executive Joanne Segars announced the National Association of Pension Funds would become the Pensions and Lifetime Savings Association (PLSA). This change is a recognition that as the world changes we need to anticipate and shape this change. We want to speak for the workplace pension community, from the biggest defined benefit (DB) scheme to the newest auto-enrolling employer, and we must think about how retirement is changing, how pensions interact with ISAs, property and other savings.
DB schemes have faced huge change over recent years and are in particular need of support from the industry and from government. Over the last 40 years our members have reported active membership of private sector DB schemes shrinking by two thirds: 3.5 million (1975) to 1.1 million (2014). Increased longevity, difficult market conditions and a tough regulatory environment are all contributing factors to this decline. DB provision must be supported to prevent this from posing a threat to the security of members’ pension provision and the role that DB pension schemes play in UK investment.
We must avoid undermining the important function DB pension schemes carry out in the economy as a whole, as employers are being forced to pay in record levels of contributions – money that otherwise could have been invested in their business.
One challenge facing DB pension schemes is that as they mature their tolerance for funding risk falls, leading to a demand for assets that track their liabilities more closely and generate more stable cash flows. Unfortunately there is a fundamental shortage of the assets needed by pension funds and the Pensions and Lifetime Savings Association is urging government to address this problem.
Traditionally DB schemes have invested in index-linked gilts to better hedge their liabilities. However, yields on index-linked gilts have been a declining trend for the past 20 years, making it more expensive for schemes to purchase them as part of a de-risking strategy.
An alternative is infrastructure, as the right kind of infrastructure assets can deliver low risk, inflation-linked, long-term investments. However, pension funds need access to the right kind of infrastructure assets, structured appropriately. We need government to structure infrastructure projects in such a way that sufficient risk is mitigated to make them appealing. While the recent appointment of Lord Adonis as chair of the new Infrastructure Commission was a good start, the Commission will need to encourage the government and the market to structure projects in such a way that it makes sense for UK pension funds to invest.
There is plenty of work still to do, but with DB pension schemes holding over £1trn of assets under management, it’s vital we make this investment work as hard as possible in the interests of the millions of people saving in them.
The PLSA is determined to make that happen – and that won’t change.
Graham Vidler is is director of external affairs at the Pensions and Lifetime Savings Association
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