The UK Government’s new pension policies and the DB surplus opportunity

Yesterday morning, as I was reading through the transcript from Jeremy Hunt's Mansion House Speech and the 11 new papers from DWP and getting a sense of the scope and ambition of the areas for change, I asked a colleague, is this as big as A Day. No, he said, because many of the papers are, at this stage, consultations or calls for evidence, so we're still early in the process. But nonetheless, this does feel like a moment in time for pensions.

Why is that? Partly, I think, because there's a sense of many factors having come together that are driving momentum and change, from the aftermath of the LDI crisis, the political imperative of supporting individuals through a tough time whilst boosting the economy, and from innovation within the pensions industry itself. And we'll come back to that a little bit later on.

But this is a big moment partly also, because there's a clear unifying vision for what pension schemes can be for members and what they can do in support of the UK economy. And it's a vision that appears to be win-win-win for each of members, employers, and the UK economy. The vision seems to be able to galvanize action across many parties, including, importantly, with both the DWP and Treasury pulling together. So how great to be part of this moment.

For today's webinar, we've assembled a cast of colleagues to help us pick through what's being said and share some initial views on what the implications are for our schemes. So Alasdair MacDonald will start us off with some context on where these ideas are coming from and why. We'll then look in more detail at the changes that largely affect DC schemes with Anne Swift and James Colegrave and then those that are more focused on DB with Graham McLean and Alasdair again. And we'll finish with a quick look at trustee skills with yours truly at the end.

For each section, we'll share one or two introductory slides and then break into a Q&A. I have some pre-prepared questions for our speakers, but I would love it if you could all submit questions throughout to as and when they occur to you and we'll try, and address them as we go along. The Q&A panel is to the left of your screen. If we don't have time to get to any of your questions, we will respond individually afterwards. And then we've also prepared some poll questions for you, which again, will intersperse where the time allows today.

If you're experiencing any technical difficulties during today's webinar, please also use that Q&A function. And at the end of the webcast, which is due to finish by 11 o'clock, we'll ask you to fill out a short questionnaire just to let us know about your experience today. So without further ado, I'm going to hand to Alasdair to help us set our context.

ALASDAIR MACDONALD: Thanks, Jenny. Good morning, everyone. Hunt's Mansion House Speech starts from an economic vision. So as investors, we want high expected returns and low risk. Similarly, the Chancellor wants high growth and low inflation.

Policymakers only have the three levers shown here to achieve that desired outcome. Interest rates are not going to be helping growth any time soon. And after the Truss-Kwarteng budget last year, fiscal policy is now constrained. So the Chancellor is being forced to pull the harder longer term lever of regulatory policy.

Now, normally this is a bottom-up DWP activity, but it can be used in a top-down fashion by the Treasury to change the number of players in a market and their individual incentive structures. So a good example was privatization in the 1980s, replacing state monopolies with a number of smaller players with a profit motive and a regulator. Today the focus of such supply side reform is the supply of productive finance to the UK economy.

So the definition of productive finance is shown on our next slide. The problem is that the UK has a low level of investment, compared to its peers, at a time when, arguably, the economy needs more investment in net zero, reshoring of production from China, and innovation, such as AI. And if we don't do anything, the current course will see that level decline.

The DB industry is shrinking, and the actual percentage allocations to productive finance will decrease as schemes are looking to settle or de-risk as a result of their strong funding positions. And the problem with DC is, yes, it's exponentially growing, but allocations, historically, to productive finance have been very small. Therefore, far from increasing over time as required, levels of investment in productive finance are likely to decline without some regulatory intervention.

Now, making productive finance in the real world is hard, unlike buying a listed share, which we can just do on our phone very quickly and easily. For example, there's a minimum fee budget for investing in productive finance, let's say, 100 basis points or more. There's a minimum ticket size to make this economically worthwhile for an investor, probably tens of millions of pounds, but actually, a lot more if you want a slice of certain assets, say Heathrow, for example. And investors require the right governance and expertise to be successful at this investment in productive finance.

Therefore, as shown here, using PPF numbers, it tends to be the preserve of the larger DB schemes, but the rewards for them can be considerable. They have the ability to build a more diversified investment strategy with a significant return kicker from the illiquidity premium. We talk about generating an equity like return for a half to 2/3 of equity risk, overall.

Now, the Chancellor had his sound bites on Monday night, and I have two here. The catch is that 97% of DB schemes don't have the scale to access these premium returns from productive finance, and the DC industry is so obsessed with low cost offerings that it can't afford the cost of private markets. So how do we change this?

Well, the first thing to note about is that the proposed reforms are much wider than just pensions. We're not being singled out as an industry. It's also listing rules-- MiFID II, Solvency II, and so on.

We're seeing a holistic package with the 11 publications that Jenny referred to. It would be wrong of us to assess each component in isolation. We need to think about how the overall jigsaw fits together to achieve the Chancellor's top down aims. And as noted before, this is a top down initiative, so we see unprecedented cooperation between the DWP and Treasury.

Now, we mainly have consultations at the moment, rather than specific policy proposals, but Hunt in his speech set out three golden rules that give us some idea of what eventual policy action might be. The first and most obvious is that all these proposals should look to improve member outcomes. The second very welcome one is that these proposals should maintain resilience of the gilts market.

As many commentators have pointed out, encouraging pension schemes to switch from gilts into productive finance risks a repeat of the LDI crisis, because pension funds own about 90% of the index-linked gilt market. And then the final objective, that golden rule Hunt has set, is to promote competitiveness of UK financial services.

So with that, I'll let my colleagues explore later some of the details of the policy package. Back to you Jenny.

JENNY GIBBONS: Thank you very much, Alasdair. It does feel like we could spend the rest of the hour in this space, because it's fascinating. But let's push on then into the actual detail of what's being proposed.

So I'm delighted to be joined by Anne Swift now. Anne, you have kindly agreed to tell us about the Mansion House Compact. What is it? And what does it mean?

ANNE SWIFT: Yes. Thank you, Jenny. Well, obviously, there have been quite a number of initiatives and consultations over the last few years looking at the challenges of DC schemes investing in illiquid assets.

So for example, we've recently had the launch of the first new LTAFs, that's long-term assets funds. That's a new structure of fund that provides more flexibility for DC schemes to allocate capital to private market investments. And in his speech, the Chancellor announced an initiative really aimed at boosting investment in illiquids and focusing on private equity in particular, so looking at new businesses in the technology and science sector, for example.

The Chancellor has estimated that around half of 1% of assets are currently invested in private equity, and that's lower than other markets around the world. So for example, in Australia, the level is around about 5% in the major Australian super trusts. And the government's done some calculations to look at the potential impact on a member's pension pot, so looking at an average member, how much difference could an investment in private equity make.

And their estimates are looking at an increase of around about 3%, if 5% of the member's pot was allocated to private equity. Now, obviously, that's highly dependent on the overall investment, makeup of a member's fund, and the period for which the investment is held, as well as the cost of the investment. So there are some assumptions that you need to make and bear that in mind when you're looking at some of those numbers.

The Mansion House Compact, though, is effectively an agreement, a signed agreement, of nine of the largest pension providers committing to invest 5% of their default funds in private equity by 2030. And I think that's really important and welcomed. We really need the biggest pension companies to take the lead, to build scale in these products. And we need innovative fund solutions to emerge from the fund management community if this is going to succeed. And the government have also said that if other schemes follow, the estimates are that around 50 billion pounds could be allocated to high growth companies by the end of this decade.

JENNY GIBBONS: --up front there that the level of investment in private markets in the UK within DC schemes is currently really low. Why is that?

ANNE SWIFT: Well, I think it's a combination of things. I think the fund structure and the operational challenges have been there. So for example, DC investors are effectively retail investors. And most DC schemes operate through insured fund platforms, and that means that the fund structure has to work in a regulated environment and a lot of private equity, private market funds have been unregulated space, suitable for DB, but haven't been able to work for the. And that's why the LTAF, for example, is one such new structure that has been regulated by the FDA.

And operationally, investing in illiquids, investing in an asset class where, by its very nature, you are locking your money up for a period of time, you can make the case from an investment perspective. But DC operational systems administration systems, certainly in the UK, they've been built around daily trading, daily pricing and the individual liquidity that members need is still there. Now, that's not to say that we can't overcome that barrier. And again, working with blending funds together in default structures where you can blend illiquid and liquid elements of a portfolio, I think, is the future way that that will be developed.

And of course, fees-- Alasdair mentioned productive finance fees, if you're looking at maybe 100 basis points. That's well above charge cap world in DC space and well above the fees that most DC members will be currently paying for their default investments, particularly if they're in a passive tracker fund, for example, obviously, those fees are going to be going to be far, far lower. So again, that isn't something that you necessarily need to put a barrier on completely, but it is a big it is a big leap. Allocating a 5% allocation in a default fund to a fund that costs 1% is going to give you a five basis point add-on to your to your fee.

I think the other the other thing on private equity in particular is they often come with performance fees. And in fact, the Chancellor's calculations or the government's calculations around the benefits of this assumed a performance fee would be there. And again, that's one of the consultations that we've had recently around the charge cap and how you might allow for performance fees and how you might allow for the lumpiness of those fees over time. Again, that's welcomed if you're going to create this flexibility in the fund structure.

JENNY GIBBONS: Yeah. Thank you. And then we've heard about these nine schemes that have signed up to the compact. Are we expecting now that other schemes will begin to follow suit?

ANNE SWIFT: I suppose the answer is, potentially. But I do think it's going to require that scale to build to a sufficient level and investment products to be developed and launched that have attractive pricing before we see a wholesale jump into private equity.

I think, I suppose, another challenge, potentially, is we haven't seen the end of consolidation. So we do know that schemes that are currently operating under their own trust, some of them may still be looking at some point to go into a Master Trust. And if you've allocated a part of your portfolio to an illiquid asset effectively, that could prove a barrier to actually then making that transition into a Master Trust. So I don't think it's going to be necessarily as quick as perhaps the Chancellor has in his mind, but I do think that there will be definitely interest and consideration of whether this makes sense for a number of schemes.

JENNY GIBBONS: OK. And so, actually, we've got a question come in from the audience on this. Do we know who the nine pension providers are that have signed up to the compact? And is it predominantly Master Trusts amongst those nine?

ANNE SWIFT: It's predominantly Master Trust. So it's the likes of NEST and a number of commercial Master Trusts, so I think Legal & General, Aegon, and a few others are on the list. And then I think there are also some big with-profits providers. So M&G have announced that they're going to do that for the prudential with-profits fund that they manage. So it's a combination of those sort of commercial Master Trusts, the super trusts, the NESTs of this world, and one or two others.

JENNY GIBBONS: OK. And a comment here which perhaps you could respond to, Anne. Isn't the challenge with investing in high-growth assets that you'll also be investing in higher-risk assets, and for each winner, there will be firms that fail? And actually building on from that another comment, that if the rewards were there, surely markets would have moved that way already. So I don't know if you'd like to respond to those two related points.

ANNE SWIFT: So I have a lot of sympathy with that. And absolutely, I think the risk side of the equation has to come hand-in-hand with the reward or the potential reward. And you're absolutely right, there will be winners and losers in this.

So we would be looking for very diverse funds to be built that are investing across a range of different investment opportunities in the private market space. But it's going to need careful thought as to how you then build that into a members portfolio, because what you don't want to do is suddenly increase the level of risk that a member is bearing exponentially in order to chase that reward. So it has to be a balanced approach and it has to be taking the right level of risk at the right at the right time.

As to the second part of the question, would we have done this already, it's hard to say. I think the challenges, the operational issues that are already there and are still there have been maybe put in the too-difficult corner for a while. And think that's it's only now that we're starting to see platform providers, fund managers actually getting to grips with this to make these sorts of things happen. So I think it's a bit of a slow burner, and that's why I say I don't think it's going to be as quick for DC schemes, other than the big Master Trusts to do this, as perhaps the Chancellor would like.

JENNY GIBBONS: So again, it's that distinction between some of the operational barriers, rather than the philosophical barriers.

OK, this feels like a good time to go into our first poll question. So, Humphrey, if you wouldn't mind loading that up for the audience. The question is, would you prefer it if your DC scheme's default fund included around 5% in unlisted assets. So the options are yes, no, don't know, and of course, not applicable if you don't work with the DC scheme. So it'd be great if people could be applying themselves to that poll question.

And I'm just having a quick scan through any other questions that have come in. So perhaps we could just address one more here. And any challenges in terms of members transferring their DC pot when changing employers?

ANNE SWIFT: That's a very good question. Individual liquidity should be fine if a member is not just solely holding a private equity fund, for example. So if you're blending something in a default, you'll have cash flow coming in that can pay for cash flow going out for an individual member. So it should be OK.

I suspect in practice, as we've seen in the past with things like property funds, when they've been gated from time to time, we just need to be mindful that there could be circumstances where there may be a delay in members getting their hands on their money and transferring. But then that has happened in the past with other illiquid assets that have been there in DC schemes.

JENNY GIBBONS: Yeah. OK, thank you.

OK, we've got some responses through from the poll, so if we could put that on screen. So we can see that, obviously, for some people, this question wasn't applicable. And for a quarter, it's still, don't know, still this is brand new and we're still thinking about these things. But amongst those who've given an answer, we've got twice as many, just over twice as many have said that they would prefer it if their DC schemes default included that 5%, as compared to those who wouldn't. So that's a reasonably strong response. Any views on that, Anne?

ANNE SWIFT: Yeah, I'm positively-- I'm not saying I'm surprised by it, I think I'm sort of fairly positive about the result there. I think we would definitely be in the-- this is encouraging and welcome news. And if it works, I think it's very, very good. So yeah, I'm pleased to see that there's a you know a majority that would be in favor, but think it's a wait and see as to how it all works in practice.

JENNY GIBBONS: Yeah. OK, let's move on then to the next subsection, which is in respect of the other measures that were mentioned yesterday for DC schemes across the publications, some of them via consultation responses, some via calls for evidence. I would like to welcome James Colegrave now. James, are you able to give us a quick summary of what were those ideas and what your initial views were on them?

JAMES COLEGRAVE: Thank you, Jenny. Hopefully, you can see them on the screen. As a package, we welcome the changes proposed for DC schemes and recognize that the DWP and Treasury worked really hard to seek the input from multiple parties before signposting the way forward. Hopefully, over time, that will ensure that a broader political consensus can be maintained and we don't find ourselves flip flopping around in the future.

It's not only small pots-- the DWP believes it can kill two birds with one stone by tackling the problem, which is a huge problem, of small pots in a way that also helps to consolidate the Master Trust market. Having previously consulted on creating one default consolidator, the DWP now favors multiple consolidators, with all Master Trusts having to apply for default consolidator authorisation under a proposed new regime. Pots below 1,000 pounds will be transferred automatically after 12 months, except where members actively say their money should be left where it is.

There are already around 12 million pots in this category, worth around 4 billion pounds in total. Members could choose the consolidator. And where they don't, the DWP proposes a clearinghouse that will allocate one. A system the Australians call stapling is seen as a way of stemming the flow of small pots in the future, although the DWP says it's clearly some time off. This would involve employers paying into a pot the employees have chosen.

On value for money, trustees will already be familiar with the need to annually assess VFM, but the DWP has indicated that it will progress its proposal for VFMs to look at investment performance, gross of charges, costs and charges, and then quality of services. Good news is this broadly follows the current WTW three-pillar VFM model, but the DWP proposals are much more prescriptive to ensure consistency across schemes.

TPR will be given new wind up powers, where it's in the best interests of savers. And the requirement for a chair statement may well fall away in time, so as to avoid the overlap between the current chair statement and the published VFM report. Interestingly, bulk transfers without consent for contract-based schemes are to be assessed, which would really help employees or those employers who changed their pension arrangements and would further facilitate the consolidation into Master Trusts. The FCA will take the lead on that.

As originally proposed, providers will be required to publish framework data each Q1. VFM assessment reports will then have to be produced by the end of October and published by the end of December in each year, so it will be an annual process going forward. Helping members at the point of access, a new consultation, could lead to new duties on trustees to provide decumulation services and solutions, either in-house or through partnering with external providers. CDC is mentioned in this consultation and may well have an important role here, with some arguing that CDC could deliver 30 to 50% higher incomes in retirement.

Then on to auto enrollment. As you already know, following Jonathan Gullis's Private Member's Bill, the government is supportive of the idea of reducing the minimum age for auto enrollment to 18, potentially even 16, and requiring contributions from pound one, not from 6,240 pounds per annum, as is currently the case. However, the 10,000 pounds per annum trigger for auto enrolling would remain in place.

And last but not least on my list here is CDC. As we know, Royal Mail has launched its first or is launching its first CDC scheme. And the government is a strong believer in CDC and proposes to lay the groundwork for multiple employer CDC schemes going forward, through a type of Master Trust, as I noted above, allowing CDC schemes to offer decumulation products. WTW is hugely supportive of that initiative and sees CDC as the next generation of pension provision.

JENNY GIBBONS: Absolutely. And actually, that's quite a raft of changes there that you've taken us through James. Overall, do we see the Chancellor's and the DWP's proposals as good news for DC savers in the UK?

JAMES COLEGRAVE: Very much so. The drive for consolidation has to lead to better governance, less schemes, bigger schemes, better risk-adjusted investment returns, I would say slicker administration, drives innovation. Charges will also come down, but this is not all about charges. But we also expect to see those reduced over time.

JENNY GIBBONS: OK. And if I were a client looking to set up a new DC plan today, is a Master Trust likely to be the only viable solution now?

JAMES COLEGRAVE: Yes, you might well think that, but the answer is no, absolutely not. There will continue to be circumstances where, for example, a GPP might be the right answer, for example clients wanting a lot more investment choice for their employees. There will always be circumstances where a DC scheme, standalone DC scheme, possibly a section of a hybrid trust may be the answer. That latter one is important, because we are seeing DB schemes starting to develop significant surplus. That surplus could be harnessed to pay for DC contributions. So very much see an ongoing role for standalone trusts.

JENNY GIBBONS: OK. Thank you. And then from what I understand, this annual cycle and the value for money assessment process, that's going to be a reasonably significant undertaking by the sounds of it. Is that likely to lead to a big increase in governance costs for schemes?

JAMES COLEGRAVE: Yeah, but I regret to say those running DC schemes have seen their governance costs going up over the last few years with chair statements and now VFM assessments. This new style of VFM assessment will be harder to do, it'll be more costly, and I'm afraid costs will go up, at least initially. I think that over time, costs will start to drift down as we build efficiencies into the process. But I'm afraid those wishing to see cost savings won't see them come through, unless of course, they move to a Master Trust.

JENNY GIBBONS: OK. I think we've probably got time to take another poll question here. So I'll ask Humphrey to put that on the screen.

So have the government's proposals affected whether you outsource your DC provision, for example to a Master Trust or GPP? So this is almost a straw that breaks the camel's back type question. So your options in terms of whether these proposals have affected the outsourcing of DC decision, the options are-- we've already done that anyway, we were already planning to, we weren't planning to, but now we are likely to, and then we weren't planning to, we still aren't likely to make that change, we don't know, or again, not applicable to the extent you're not dealing with a DC scheme that's in this position. So please do go ahead and submit your answer to those options.

And then just while people are answering that poll, James, another question for you. So if my scheme already pays DC contributions from the first pound, do we need to worry about the auto enrollment changes? Does it make a difference to us?

JAMES COLEGRAVE: At headline level no, because that's already in place. I do wonder whether that change may lead the DWP to rethink the certification options, because if you're already pensioning from the first pound, chances are you may well be going for one of the three certification options, Set 1, Set 2, Set 3. Will the government take another look at those? We don't know yet.

JENNY GIBBONS: OK. And let's see what we've got then in terms of responses to the poll question. So the one I was looking for, that I was particularly interested in is those people who said, we weren't planning to change, but given this raft of changes, we will now. So that's the people for whom the straw has broken the camel's back, and that group is only 4% in the middle there. So it doesn't look like this is necessarily going to drive substantial change in terms of the governance burden having just got too high. Anything else, James? Any views on that or final reflections?

JAMES COLEGRAVE: I'm just looking at that poll. I think it's early days, as we're still digesting what it all means. I'm not surprised that number is low. But I think, as people start to get used to these changes, they may well take a step back and think, are we really doing the right thing.

JENNY GIBBONS: OK. Thank you very much.

So now, there's a lot in common in terms of what the government is aiming for across DB and DC, so across both better outcomes, investment in productive finance. But there's a very different starting point and regulatory regime in play in DB, versus DC. So let's shift to DB now, and I'd like to invite Graham McLean to join us.

So Jeremy Hunt noted in his speech on Monday evening that there are currently around 5000 DB schemes and that the landscape is too fragmented, therefore there's scope for consolidation. So, Graham, could you summarize for us what the government is proposing here and how that might change what options are available to schemes?

GRAHAM MCLEAN: Thanks, Jenny. I guess, if I jump straight to the punch line on that, the government's pretty sensibly chosen not to go with some of the more extreme suggestions that have been making headlines recently. So for example, those that have read it, the Tony Blair Institute paper included what I'd describe as some pretty eye-watering proposals for compulsory consolidation across all DB and DC schemes. And that route would have either been pretty impossible from a practical perspective in terms of administration and actually consolidating schemes, or it would have required wholesale changes to members benefits, which really just isn't going to be palatable for the government. So really, what they've put forward is about extending the consolidation options that are available to trustees and sponsors, and I think making it easier for them to assess those options and access them.

But I think just to help explain a bit of context, I think it makes sense to just first take a bit of a step back and look at why Jeremy Hunt referred to fragmentation in his speech and what the government thinks consolidation can bring in the DB space, and that really then shapes what they're proposing in the consolidation area. So I think the sheer number and variety of DB schemes makes them something of a regulatory headache for TPR and other bodies. And you can see from the chart on the left of the screen that you've got a very significant number of schemes that have got pretty small asset pools.

And this is taken from the PPF. The data is about a year old, so the pools have shrunk, but you're looking at about 70% of schemes having assets less than 100 million pounds out of the 5000 in the universe. And the government thinks that those smaller schemes are much more constrained in how they can invest. And in particular, they're not going to have the size of the asset base or the expertise that they realistically need to start investing in productive finance assets that Alasdair talked about earlier.

And really, the government sees consolidation primarily as a means of facilitating investment in those assets, but they have also set out in the paper other benefits for larger schemes, for economies of scale on fees, et cetera, getting access to the best ideas in the industry and having access to professional governance resources, which they think can all combine to deliver better outcomes to members in conjunction with the investment opportunities. So I'll come back in a second to the different forms of consolidation and what the government's proposing, but the other one to highlight on here is they've also suggested that some of these vehicles could introduce significant pools of new capital into the UK, either through capital injections if schemes are underfunded and they're going to a consolidator and need to be brought up in funding level, or through the capital that's needed to provide security for the consolidation of the vehicle, either an insurer or a commercial consolidator. But I'll come back to that point.

So in terms of what the government thinks could happen with consolidation-- this is drawing together their response to the consolidation consultation and also their call for evidence on the options available for schemes. And it's obviously a simplified picture on the screen, but in very broad terms, what the government is thinking of is splitting schemes into those where buyout is affordable in the foreseeable future and those where it isn't. And the consultation response is a little bit vague, but it's really suggesting that the foreseeable future in that space is about five years subject to review in light of experience. So where buyout is affordable, schemes of the choice of either running off under their own steam or moving to buyout, and that's pretty much the same as currently. So trustees need to decide what's in the interests of members or weighing up those options, but buyout is effectively the only consolidation route that's available to those schemes.

It's a little different where buyout isn't affordable. We still have the choice of running on either indefinitely or until buyout or one of the other options becomes affordable. But in terms of the consolidation options that are available, this is where things are changing in the government's eyes. So effectively, here, buyout is unaffordable, so you have the option of a commercial consolidator, firstly, which encompasses either DB, Master Trusts or super funds. But in the interest of time, I'll stick to the super funds as I think they're the main focus of the consultation response that was published yesterday.

And the concept of a super fund has been around for quite a while, but the government has provided more clarity around how it sees them working and also how they see them sitting alongside the existing buyout market. So just to recap, a super fund is where you break the link with the existing sponsor covenant for a scheme by transferring across the assets and liabilities of the scheme to another pension scheme. And that scheme is operated by a commercial entity that provides capital backing that provides security for the benefits and possibly have a cash injection from the sponsor to meet the super fund's entry price. And that's the point I talked about earlier, where the government thinks it could introduce new pools of capital.

But you've then got the super fund able to run the scheme on either indefinitely or working towards a buyout, and they're going to seek to make a profit from investment out-performance. And the idea is that they're able to take more risk than the seeding scheme, either because the security that's provided by the capital backing sits behind that risk, or through what they refer to as patient capital, where the super fund is able to sit there and wait for buyout pricing to improve as the scheme matures and effectively then transact at a later date and make some money that way.

So I think it's pretty clear from what the government's put out that they are pitching super funds as a less secure option than a buyout, and they're saying that they're comfortable with around a 2% chance of benefits not being delivered in full under that route. But there's potentially a cost about 10% lower than a buyout premium, if you go to a super fund in the papers. So that's potentially quite an attractive option in some circumstances, even if it's not really right for every scheme. And the government's clearly hoping that super funds can be made a sufficiently attractive option to trustees and sponsors to build them up to a size that can then facilitate the investment in productive finance and a wider range of asset classes than the transferring schemes could have accessed individually. That's basically the government's prize in all of this.

The new piece in the jigsaw, the slight wildcard is the idea of a public sector consolidator, and that's floated in the call for evidence that the government's published. That paper is very light on details as to how the government thinks this type of entity might work, beyond really asking for views on the possibility that PPF could take on the role and asking the industry a lot of questions about how this might work. But I think, really, what's sitting behind that idea is a recognition that there are an awful lot of schemes out there, particularly at the smaller end of the range, that probably aren't going to be attractive to a commercial consolidator. So I suppose the government's thinking that this type of vehicle to really hoover up the schemes that commercial consolidators aren't interested in and build those up to be a large enough pool to invest again in productive finance. And maybe given it's a public sector body with the government being able to influence or direct how those assets are invested.

JENNY GIBBONS: Thanks very much for that, Graham. So we'll come back in just a second to this idea of a public sector consolidator specifically. But across the range of options then, Graham, do we think that consolidation is going to change the landscape for pensions significantly?

GRAHAM MCLEAN: It's an interesting one, because I think all the potential benefits of consolidation that the government has outlined are valid. And if they can get this to work, then it should genuinely be a win for members and for the wider economy. But I think, thinking back to the chart I showed earlier, why that shows why consolidation is attractive to the government, I think it also points to some of the difficulties.

So the government talked in the papers about pooling of local government schemes, where Jeremy Hunt indicated that a target size of 50 billion pounds plus is the minimum. Whereas if you aggregated the 1,800 smallest DB schemes, they'd only stack up to about 17 billion and that would be a pretty significant task. And then at the other end of the range, I think 60% of DB assets roughly are held by the top 3% of schemes. So really, getting consolidation to happen in the right parts of the market to achieve the government's aim of having critically sized funds isn't going to be easy. I think it is doable, but I think it's going to take time to happen without a strong push or incentive for schemes.

JENNY GIBBONS: OK. And then we've touched on it a little bit, but back into a public sector consolidator model, what are the main challenges to making this big change that's envisaged actually happen?

GRAHAM MCLEAN: I was worried you'd asked me that. That's potentially quite a long list, but I think the challenge is really are primarily around deciding who'd stand behind that type of fund if things do go wrong. So the existing PPF is backed by other schemes. I think if schemes are entering this on a voluntary basis, A, you're reducing the pool of schemes that stand behind the PPF, but also, I'm sure a lot of sponsors won't want to be standing behind this type of consolidator. But equally, the government's probably not one to be the lender of last resort here.

Would this replicate scheme benefits? Or would it produce a standardized structure like the PPF? That's a big admin challenge. How do you determine the entry price? And what happens when you get schemes that have got different levels of funding admitted? Do you scale benefits back or do you just accept the cross-subsidy?

And think alongside that, the other challenge is that the government's going to need to ensure that if it does provide this type of option, it doesn't have an undesired effect on the buyout market or the commercial consolidator space. So I think, really, this is very embryonic feasibility-stage stuff for the government. But if it can be made to work, and I think a lot of minds are thinking about this, then it's definitely an interesting proposition. And having more options available to trustees should ultimately provide better outcomes for members if they're implemented properly. So I guess across all of those pieces, it feels to me like consolidation is potentially a bit of a longer play for the government, whereas the possibility of freeing up investment within existing DB schemes would be a much more immediate win for them.

JENNY GIBBONS: OK. And we've got a couple of questions coming in from the audience, as well, Graham. So nothing was announced on the new funding regime, which might have been an obvious place to start, if we're worried about how pension schemes are investing. Do we expect that to change, i.e. the funding regime to change?

GRAHAM MCLEAN: I think we will see some change. I think the big concern really is that the proposals for low dependency were herding schemes towards a place with a lot of security and herding of investment strategies, which isn't helpful for markets.

I think what we will probably see is more clarification around what the DWP intends, because the regulator's draft code of practice set out a much more liberal view of what low dependency looks like. So I think we will see some softening of the regulations to make it clearer what DWP expects. And it will probably mean, to some extent, that we're actually seeing less change in the regime. I think the overall structure of moving to a low dependency basis is going to stay, but the government is going to need to pitch that to make it clear that runoff is still an attractive option for a lot of schemes.

JENNY GIBBONS: OK, thank you. I have got a few more questions that have come in. And actually, there's a there's a few that are on the subject of ESG climate net zero commitments and whether some of these consolidation changes are going to take us in that direction. So, Graham, you're very welcome to respond on that, or I can-- we're going to Alasdair next, so I can ask the question to him.

GRAHAM MCLEAN: I will pass those to Alasdair, I think.

JENNY GIBBONS: Lovely. OK, let's do that. So if we could have Alasdair back in on screen. Alasdair, I wonder if we maybe address that question up front before we get on to some of the other options that we've talked about. So I guess in the DC or the DB space, what does this mean for net zero ambitions?

ALASDAIR MACDONALD: I think, as I alluded to, if you're Jeremy Hunt looking at the UK economy, your view is, we need more investment to facilitate our net zero transition as a country. And similarly, we've put the onus on pension schemes to also, with their TCFD reporting, go on a net zero journey, as well. So I think everything is nicely aligned here. A lot of the productive finance could be in renewable energy assets and similar infrastructure assets. So I think, absolutely, these investments will help schemes from an ESG perspective and they will help the UK economy make a real difference to everything.

JENNY GIBBONS: OK, brilliant. Thank you. So back into consolidation and the consolidation spectrum, given the distribution of schemes that we've heard about, particularly at the larger end, there's only so much that it sounds like consolidation is going to be able to do. And would, Alasdair, this be more powerful if combined with DB schemes standing to benefit from investing in these type of productive finance assets in ways that directly affect them as a standalone scheme?

ALASDAIR MACDONALD: Yeah, that's right, Jenny. As Graham said, consolidation is not really going to move the dial here on productive finance. The key thing is the other bit of supply side reform I talked about at the beginning, which was changing the incentive structure for pension schemes, so can we encourage larger schemes to not de-risk further from here, can we encourage them to settle later, rather than settle now.

Now, conveniently, we published a white paper a few weeks ago setting out six regulatory changes that we think would encourage exactly this. Without going into the precise details here, our vision is a new deal for pensions, where the surplus can be efficiently shared with the sponsor and the pension scheme members who originally funded it. This immediately makes risk-taking for pension schemes much more symmetric than it has been and should dis-incentivize further de-risking.

We're very pleased to see that our white paper has heavily influenced the questions that the government is asking in the DB investment consultation paper, but a final thought is that any package of reforms will need to be carefully calibrated. Too much incentive to take risk from here will result in sales of gilts, that's going to break one of the golden rules, whereas actually too little change in the incentive structure is not going to move percentage allocations enough, given the underlying headwind of closing schemes maturing and shrinking in size. So the government's got a balancing act from here to make this work.

JENNY GIBBONS: Yeah. Now, the white paper that you mentioned there, Alasdair, contains these six proposals that, as we say, as a package, we feel like, could really move the dial for DB schemes running on and using surplus in productive ways. And one of the suggestions amongst those six is allowing the use of DB scheme surpluses to benefit DC members, including DC members that are in a different trust and facilitating that use.

Now, Humphrey, I wonder if we could launch the next one poll question, please, because this is on DC specifically. So the question for the audience here is, if legislation made this easier, how likely would your organization be to use a DB surplus to improve DC contributions. And the options we've got here on a sliding scale are-- very likely, quite likely, not very likely, or not likely at all. And there is an n/a option for either anyone who's not working with a DB scheme or actually where no surplus is likely to materialize. So I will let people look at the options there and select the appropriate response.

I've got a question here, just while people are answering that poll. What would be the consequence if a superfund failed? Graham, would you like to tackle that one?

GRAHAM MCLEAN: It's an interesting one, because initially, superfunds potentially are going to take some time to grow, but they are pension schemes in essence. They are a pension scheme with capital backing and run by a commercial provider, rather than a sponsor. But they are ultimately a pension scheme, they are under the pension scheme regime, rather than the insurance regime. So there is a lower level of protection and the government is acknowledging that they might fail either with benefits having to be scaled back or some other sort of protection standing behind. So it could fail with, I guess, political consequences for the government, if they have encouraged the superfund market. But I think they're aware of that, they're just putting it out there as another option, admittedly not the gold standard, if you like, of a buyout.

JENNY GIBBONS: OK. OK, then so let's have a look at the poll results. So again, this was, if legislation made it easier, how likely would your organization be to use a DB surplus to improve dc contributions. And looking at the distribution of results, there's a small number where this is not a relevant question and a small number who have said they would be very likely to do it, but actually, a reasonable spread amongst the other options, including a quarter of respondents who say they would be quite likely to do that, and then not very likely at 30%, and not likely at all, that strong response for about 20% of respondents. Any observations on that from either Alasdair or Graham?

GRAHAM MCLEAN: I guess, for me, the spread of responses isn't surprising, because there are schemes with very different rules, very different structures, different histories, different philosophies to approaching these things. So I think it's all about empowering schemes and giving people more options to do what is right to produce the best outcome for members. I think this highlights why compulsion or forcing schemes down one particular route isn't really a viable option. That doesn't surprise me as a set of results.

ALASDAIR MACDONALD: And I just jump in and say for this to have the effect we want of encouraging pension schemes to keep taking risk, it's secondary what any return of surplus to the sponsor is used for. I think it's nice from the perspective of the industry to deal with low levels of DC contributions. But for the productive finance agenda, that is a nice-to-have, rather than a necessary condition if the corporates can use it for any other purposes, as well, and they're still incentivised to keep taking risk in the DB scheme

JENNY GIBBONS: Yeah. OK, thank you very much Alasdair and Graham. The final section that we wanted to get on to was in respect of trusteeship. And I'll just share some thoughts on this.

So there was a call for evidence to explore how pension scheme trustees can be supported to improve their skills, overcome cultural barriers, and realize the best outcomes for their pension schemes, and subsequently, their members. There is a clear recognition in the paper that the trustee role is not an easy one. Trustees are operating in an evolving and more complex regulatory environment. But the paper notes that, and I'm quoting here from the paper, "some trustees, especially at the smaller end of the market, appear to be unaware of many of their duties and legal obligations, and the number of trustees engaging with the guidance is worryingly low."

The paper itself follows many of the same themes we've already been talking about. It asks whether the lack of skills, experience, knowledge or understanding of any trustees are presenting barriers to taking advantage of that full range of investment opportunities. And there's a clear suggestion that if trustees don't have the capacity or capability of improving their knowledge and understanding or, indeed, their required scale, then they should look at consolidation. But more generally, this paper is also asking what scope there is for higher general standards of governance through more highly skilled and/or more highly-resourced trustees.

There's mention of the Australian constructively tough approach to supervision of trustees and the resultant improvement in member outcomes that's been observed. And the reference paper that's linked into the DWP's paper, which is the Australian Prudential Regulation Authority's review of 2019, sets out a marked decrease in the number of schemes and in the number of trustees over a 10-year period, and it details activity that the APRA has taken to directly intervene on quality concerns. And it's really strong, it quotes APRA's deputy as saying, supported by stronger powers, better quality data, and a new willingness to publicly call out underperformers, APRA, so the Australian Prudential Regulation Authority, intends to turn up the heat on trustees that aren't serving members best interests, either by forcing them to lift the outcomes they deliver or forcing them out.

Now, that paper is referenced within this paper. But actually, the tone here from the DWP is very different. Albeit a different tone, there are similarities with the Australian path and the ideas that have been raised.

So the DWP asks, should all professional trustees be accredited, should other types of trustee also be accredited, and should the standards or the approach to accreditation differ between different types of trustees, what are the views on whether a trustee should be accredited on each board, or a percentage of trustees on each board, or indeed that a whole trustee board should be accredited. And then there's suggestion of the extension of the current voluntary independent trustee register to a mandatory registration system for professional trustees, which would then have unique identifiers to cross-check against training and accreditation completion. And the paper goes on to talk about the role of advice, suggesting that many trustees rarely or never disagree with their external advisor, would strengthening trustee boards improve the extent to which that challenge is forthcoming and should, as the CMA suggested, investment consultants be brought within the FCA's regulatory perimeter.

And then finally, there are some points that touch on trustees fiduciary duty, shifting away from the more traditional focus on protecting members accrued benefits to something that encompasses achieving value, with a question on whether there is a risk averse culture currently. And then finally, there are questions on employer support for trustee duties and training-- are trustees being given sufficient time off and pay to be able to complete their duties alongside day jobs and the important role of MNTs is noted as providing that greater confidence that decisions are being made in members best interests. And so accreditation requirements that were extended to the group would need to acknowledge their ability to comply from a support, time and cost perspective.

That was a bit of a whistle stop tour there. And happily, I haven't got anyone who's asking me challenging questions on this area. And actually, that fits reasonably well, because we're getting really close to time. But please do continue to submit your questions in the Q&A, including on this area. And as I say, we will undertake to get back to you, individually.

Just having a final look at the chat to see if there are any more questions that have come through that we can address relatively quickly. Trustee accreditation doesn't make an individual an investment and risk management expert, which is where the main shortcomings lie. I think that's a really fair point.

And actually, where the focus on accreditation is to do with being able to have the confidence to invest in the full range of assets. Actually, as we all know, there's so much more that a trustee does and brings value to a scheme in which isn't just about the ability to invest in different asset classes. So there is a risk of collateral damage within the proposals that are being looked at here.

And actually, that brings me on to a closing comment, which is along the lines of, please do engage in the responses to these range of questions that are being posed to us as an industry. There's an eight week gap here, and I think it's really important that we all do engage with these ideas, begin to draw out some of the implications, be positive where positivity is due, and call out things that are more challenging. It's quite hard to give a summary of what we've just heard from our speakers, because actually, it's so wide ranging. So I suppose instead I'll just reiterate my own personal positivity at where we stand as an industry today.

So the package of ideas that have been put forward are ambitious. And as we've heard, they're reasonably unified. They've sidestepped some of the speculated-upon downsides of mandating, for example with the 5% or upfront seismic shift, for example, with bulk entry to some industry consolidators. So some of those chasms have been sidestepped. And actually, what's left feels really quite positive. So we encourage that full participation, lend your voice to the calls for evidence, and we really enjoy being along the ride with you at this moment in time.

A huge thank you to our speakers who've been really kind as to share their views and kickstart some debate, especially given the turnaround time to collect thoughts over the course of the last 24 hours. Thank you, you, for all participating so fully. Loads of questions came through the chat, more than we could get to, so that was brilliant.

Please do fill out our post-webinar survey, it just takes a minute or two. And in there, there are some boxes to tick if you'd like to hear more about what we've talked about today in any particular areas. And then you will receive an email, just shortly after the session, which will include a recording of the webcast and also a link to the white paper that we spoke about.

So finally, thank you again to our speakers and to you all. And do have a lovely rest of the day.