What do the recent announcements on reform for DC schemes mean from an investment perspective?
Capita Pension Solutions
Creating sustainable and responsible employee finance schemes
Our Head of DC Investments, Jason Becker , shares his thoughts:
A key part of the proposals is that from 2027, all schemes will be required to disclose where they invest, including the level of investment in UK businesses.
As part of the Mansion House reforms and in expectation of the value for money (VFM) framework that is to follow, pension schemes should now be moving away from costs to also focus on fund performance and overall value for money. One of the ways to achieve this is through private market investments. The UK has many exciting companies in the private space focusing on climate change, bio tech, life sciences and fin tech.
These companies not only have the potential to provide higher returns, but could also contribute to ESG and sustainability requirements. This should translate into the potential for improved performance, while simultaneously contributing to economic growth.
It is important that when considering where to invest, schemes take their fiduciary duties into consideration, including which region and asset class will result in the best outcomes. Private markets have the potential to provide higher returns than listed companies and exploring these in the UK market presents a potential opportunity.
When assessing the investment performance, a key consideration will be how benchmarks are defined and how risk profiles are considered. I have always been sceptical in only comparing performance of asset managers using their own set benchmarks.
These differ from one manager to another (even with similar assets) with some wide variations. Benchmarks can include cash plus benchmarks, inflation benchmarks and composite benchmarks. ?Currently, only limited comparison is being done to highlight who may be underperforming and why.
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The new disclosure requirement will enable schemes to understand their investment strategy in more detail and how their performance stacks up against the rest of the market. This level of transparency is important to show members that they are receiving the best value for money versus other competitor schemes.
The proposals will help with transparency, comparison and understanding where savers pots are invested. This should encourage more schemes to consider and include investments in UK assets.
Detailed performance comparisons are to be welcomed. We need to move away from arbitrary benchmarks and focus on how schemes can improve member outcomes. Comparisons will ensure that schemes are constantly innovating in terms of investment strategy design and implementation for the ultimate benefit of members.
Please feel free to reach out to Jason Becker or the Capita DC investment team if you would like to chat more about the recent reforms and the potential impact on your investment strategy.