The UK pensions system is about to undergo significant change driven by the government’s pensions investment review and tied to an ambitious growth agenda. In this context, it is essential we seize this opportunity to ensure our pensions system is fit for purpose to secure the financial futures of UK households, while unlocking greater investment in the economy.
Looking ahead to 2025, there are four key priorities which require close attention from stakeholders across the pensions industry to deliver on these ambitions:
A focus on ‘sophisticated scale’
While our industry supports further consolidation of the local government and defined contribution (DC) pension systems, size alone will not move the dial in terms of better investor outcomes. We must drive ‘sophisticated scale’ through an emphasis on strong governance, accountability and appropriate investment expertise to deliver the most productive outcomes and create value for money for savers.
A better scaled system will facilitate access to private alongside public market investments and help drive greater economic growth.
A cultural change that places long-term outcomes over price when defining value
Pensions are the ultimate long-term investment, and generating capital growth with appropriate risk taken over a person’s working life is at the core of what the investment management industry does.
However, too often DC schemes are encouraged to focus disproportionately on costs and do not adequately consider the full range of investment opportunities when making decisions. This has a profound impact on how capital is channelled and may not deliver the best long-term returns for individuals.
We are encouraged that the pensions investment review, and other initiatives from policymakers and regulators, are starting to address the cultural issues relating to the primacy of cost in the DC market. Getting this right, alongside greater scale, is fundamental and lies at the heart of good investment governance.
A better retirement income experience
Millions of people across the UK will rely on their pension to enjoy a comfortable retirement, and the success of auto-enrolment means that 84% of people now have a workplace pension. Despite this, contribution levels of 8% will be inadequate for many, leaving people potentially disappointed with their retirement income.
According to our research, less than half (42%) of UK adults believe that they are saving enough into their pensions to live adequately in retirement. This figure decreases further to 10% for the over 55s, the age group closest to retirement.
As well as boosting contributions, new measures should be put in place that will support pension savers in making good retirement income decisions and enable a new generation of retirement products centred on the provision of retirement income. This will benefit pension savers and the overall availability of investment capital.
More competitive and innovative UK capital markets, companies and projects
Greater investment in UK public and private markets will help drive growth and boost UK innovation, but this will need domestic and international capital. Success requires a variety of tools, including market enhancements, fiscal changes and supply-side reforms to increase the quantum of investible infrastructure, which will benefit long-term UK growth.
At the same time, reforms in areas such as planning will be essential to help ensure the supply of investible projects can match demand.
It is encouraging to see government initiatives in this area already underway, such as the creation of the National Wealth Fund. Industry is also closely engaged. A range of initiatives, including IA proposals for IPO automation, are underway to re-dynamise UK capital markets.
In conclusion, the next phase of pension reforms is critical. We look forward to working closely with policymakers and our members to help improve pensions adequacy, contribute to long-term financial resilience for UK citizens and drive greater investment in the UK economy.
Jonathan Lipkin is the director of policy, strategy and innovation at The Investment Association.
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