Risk of ‘unintended consequences’ from new pension reforms

Over the weekend the government trailed an announcement that DC pension schemes would be forced to declare the extent to which they invest ‘in the UK’, and that ‘under-performing’ pension schemes would risk being closed to new business.

Experts at LCP have studied the proposals and warn that, whilst well-intentioned, they risk having unintended consequences or being limited in their effect.

Commenting on proposals to prevent ‘under-performing’ schemes from taking on new business, Steve Webb, partner at LCP, said:

“The threat of effectively shutting down pension schemes whose investment returns are relatively poor runs the risk of causing the whole industry to become very risk averse. Sometimes it is necessary to take investment risk to achieve the best returns but those risks don’t always come good. The penalty for being an outlier will be so great that this new approach could rein in the top performers as well as challenging the under-performers”.

Commenting on proposals to force schemes to disclose how far they invest in the UK, Laura Myers, partner and head of DC at LCP said:

“Simply requiring pension schemes to list their investments in the UK will have little practical effect. There are big issues about what counts as domestic investment and just having to report something will not in itself change behaviours. Trustees will be looking for the best returns wherever they can get them, and publishing statistics on UK investments will not change that.