When it comes to productive finance, government should “improve the quality of the carrot before bringing in the stick”

In their response to the government’s call for evidence for the Pensions Investment Review, LCP are urging the government to improve the quality of the carrot before bringing in the stick.

The government issued a Call for Evidence to inform the first part of the Pensions Investment Review. The Review aims to boost UK investment and increase saver returns in the pensions system.

In their submission, LCP argues that to achieve more DC investment in private market and productive finance the government needs to focus on driving behavioural change across the industry, which has been used successfully before in DC for other areas of focus. For example, the government could adopt a similar policy framework to that used for climate risk and ESG integration, where trustees would be required to assess UK opportunities against global alternatives, before investment. This would help stimulate better understanding of UK productive asset investments, opening the door for greater levels of investment and would be a better solution than mandating any activity.

LCP also believes that a fundamental shift is needed to enhance the perception of the UK's attractiveness as an investment destination. Initiatives such as Long-term Investment in Technology and Science (LIFTS) have highlighted an opportunity for one sector, and expanding this approach to incentivise investment into other sectors and potentially regional investment would provide greater access and insight into what the UK can offer investors.

In LCP’s view, both of these initiatives would improve the quality of the carrot, without having to bring the stick.

However, alongside this, LCP highlights the fact that access to UK private market investments in certain corners of the provider market is still lacking and that this must be seen as a market failure. They still don’t even have access to the carrot. For many schemes, this lack of access includes access to any of the new generation of private market investments, including those supported by the government initiatives such as LIFTS. As such, LCP is calling for pension providers to be incentivised to increase the choice of investments for scheme and member investment.

LCP have also highlighted other areas in their submission:

• The DC market has become more sophisticated when it comes to considering private market investment in the round. This has been in part because of government initiatives such as the Long Term Asset Fund (LTAF) which allows DC schemes to more easily invest in private markets alongside the push to consider value over cost.  But more needs to be done to enable greater levels of take-up across the industry covering areas such as productive assets. The FCA should looks again at the restrictions around investing in these asset classes, to further expand investment opportunities and increase access. 

• Consolidation isn’t a silver bullet and while it might be right for smaller schemes it needs to be applied with caution. There is also a risk that a small number of providers may become "too big to fail."  Too much of a focus on consolidation means that the government could risk destroying the progress made by high quality Single Employer Trusts, given that many of these arrangements have been driving innovation across our industry. 

Stephen Budge, Partner and Head of DC Investment at LCP, commented: "We welcome the government’s focus on encouraging and stimulating private investment in the DC market. However, we believe that there are far better ways of generating productive investment interest than simply mandating things. The focus should be on improving the quality of the carrot before reaching for the stick.  While significant progress has been made, more needs to be done to break down barriers that exist when it comes to investing in productive assets and to boost industry knowledge about the opportunities available.”