The government has been urged to apply "fresh thinking" to the problem of encouraging defined benefit (DB) schemes to invest in "more productive" assets.

In its response to the Options for DB schemes consultation, pensions governance and trustee services provider Independent Governance Group (IGG) said the government should focus on addressing what it says are the two main barriers to increased investment in productive assets in the United Kingdom — the lack of incentive to take necessary level of investment risk, and the lack of mitigation of the risks involved.

On the issue of incentives, IGG suggested reform of surplus rules could give way to greater investment in productive assets.

"Allowing the use of a surplus for a wider range of benefits within an appropriate framework with clear and proportionate regulatory supervision is good for employers, trustees and the economy alike," it said in its consultation response.

IGG said if the government is not aligned with incentivising employers, a consequence will be that the main aim for most employers will be to buy out schemes with insurance companies as soon as practicable.

"On buyout, the pension scheme will sell its gilts; however, insurers are not in the market for large quantities of inflation-linked gilts and there are typically no other buyers of these assets, meaning increased government borrowing," it warned.

"Incentivising schemes to remain invested in gilts may prove to be a necessary policy for government to protect its own borrowing."

It added that the government must also consider the necessity of a mechanism to incentivise pension schemes to avoid buy-out for the next 10 to 15 years.

In relation to the risk involved in investing in more productive assets, IGG asked that there is a clearer definition provided of what is expected of pension funds when it comes to investing in more productive assets.

It also said that more needs to be done to protect schemes when investing so they do not have to worry about creating large deficits.

In particular, it proposed using a similar method to that applied to high-net-worth investors, whereby tax breaks are used to incentivise investment in some productive asset classes and negate the risk borne by the investor.

IGG chief executive officer Andrew Bradshaw, said the firm believes its suggested approach will enable trustees to demonstrate to sponsors how schemes can invest in productive assets with acceptable levels of risk and with members’ interests at the forefront.

"This is a win-win for employers, the government and the UK economy," he claimed.

Bradshaw also said that IGG supports a move to mandate the appointment of a professional trustee for all schemes.

He said the recent increase in pensions-related regulation and legislation, coupled with major events such as the LDI crisis, means the need for a higher level of knowledge and understanding on trustee boards has never been greater.

However, he warned that implementing an accreditation regime for lay trustees could deter further scheme members from stepping forward to aid fund governance.

"The broad range of skills, qualifications, and experience of lay trustees, together with their first-hand knowledge of the businesses that sponsor pension schemes, is a vast resource that has helped to underpin good governance,” he added.

Share Story: