Govt warned against plans to require DC schemes to disclose UK investments

Industry experts have raised questions over the government’s plans to make defined contribution (DC) pension funds disclose their level of investment in British Businesses, warning that this additional disclosure obligation will not drive the desired behaviours.

The government previously announced plans for DC pension schemes to be required to publicly disclose their level of investment in UK businesses, as well as their costs and net investment returns, by 2027.

However, the Society of Pension Professionals (SPP) revealed that there is "broad consensus" amongst its members that the proposals could have the opposite effect.

In its report, Best of British, the SPP noted that each of the main pension providers, covering over 15 million UK pension savers, already disclose their UK investments and have done so for several years.

It also revealed that those with higher UK equity weightings have typically underperformed those who have little or no exposure to the UK market.

The SPP said that this is also reinforced by the fact that the FTSE All Share Index grew by 63 per cent between 31 December 2013 to 31 December 2023, whilst the MSCI World Index has produced cumulative returns of 215 per cent over the same ten-year period.

Whilst the SPP acknowledged that past performance is no guide to the future, it questioned whether compelling schemes to disclose their investments in British businesses may contradict the government’s focus on investment performance in its new Value for Money framework for DC schemes and in its proposed rules around schemes needing to compare investment performance data against two comparator schemes.

"If a scheme knows that investing in British businesses may produce worse returns than investing overseas, should they still invest?" it queried.

It also warned that this additional pressure on trustees to invest in UK equities could risk eroding their discretionary decision-making powers and their focus on investing assets in the best interests of members.

The SPP also questioned the benefit of these new disclosures, arguing that it is not clear what savers or employers would be expected to do with such information.

It also argued that the reporting burden appears to be disproportionate because many DC pots are invested in unit funds – where the underlying investments may be changing rapidly.

This means that, practically, the most companies could do is report on what proportion the investment manager is targeting for a fund, as the actual proportion held in UK equities for a particular member’s pot will vary.

Commenting on the issues, SPP DC committee member, Amanda Small, said: “The SPP appreciates policymakers’ ambition to unlock capital for UK companies, but government must be careful that a new reporting obligation like this does not inadvertently channel DC schemes’ investments into UK-centric asset classes that currently neither reflect a robust investment case or meet trustees’ requirements for diversification, sufficient risk-adjusted returns and avoidance of concentration risk.

“This additional disclosure obligation will not drive the right behaviours and achieve trustees’ overarching objective, which is to provide good outcomes for members.

“If the government wants to encourage greater investment in UK companies then these companies need to offer better risk-adjusted investment returns. Ultimately this is the key driver of trustees’ investment decisions.”

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