Pension Reform Dreams vs Investment Realities + YouTube 20K special

Do governments look at pensions the way Justin Bieber looks at his sandwich? (scroll down for the meme version)

Nov 20, 2024

Hi! It’s George from Investorama - I rarely comment on the news, but sometimes the news and podcast conversations intersect. Last month I thought about launching a multi-part series about pensions, a topic that rarely sounds exciting, but a) it’s super important and b) a lot is happening in terms of tech and investments.

On November 11, I interviewed Alyshia Harrington-Clark a specialist of the pension world, three days before a big announcement by the UK Chancellor, including “the most significant set of changes to the pensions landscape” in over 20 years (Mansion House Speech 2024)

It turns out that everything we discussed about the Investment choices of Pension Funds is relevant to the proposed reform.

I’m sharing a segment of the conversation here, as it has helped me to understand this 'most significant’ reform plan and how it may play out between the announcement and its implementation.

But it’s not a commentary on the news; it’s an evergreen discussion that can also help understand ongoing pension dynamics, not just in the UK.

Below is an edited transcript from a segment of my conversation with Alyshia Harrington Clark; I will post the rest in instalments.

Listen to the podcast. Watch the video.

George Aliferis: What are the key initiatives and potential changes in the pension system?

Alyshia Harrington-Clark: In DC, the government and regulatory focus on investment has shifted much more towards UK alternative assets.

What do I mean by that? I wouldn't want to hedge a bet, to be honest, because the government itself hasn't been super clear about what it means, uses lots of different terms interchangeably to suggest that they want sort of greater risk-seeking, greater UK-focused assets, a bit more risk on, a bit more UK tilt.

The problem is some of these assets that the government is interested in either don't exist, like from a pipeline perspective, they're not there, or they're very expensive. or very, very risky.

And so from a DC [Defined Contribution] perspective, if you're sort of playing around with one person's pound that they're hoping to live off in the future, and it might be 1.20, you're probably not going to necessarily be super keen to throw that money into either very, very expensive or very, very risky assets

You might allocate a small amount, but you're not going to allocate nearly the sorts of percentages that the UK government would love to have in order to facilitate infrastructure projects and whatnot. It's their own interest to try to get UK productive assets and UK growth, as well as, you know, a green economy and all of which are very highly admirable things. I wouldn't diminish the need for all of those things. But the problem is, from a UK DC perspective, they're not necessarily the most attractive assets that you would select as an investment professional on behalf of others.

So there are some different benefits and risks associated with those assets that the government is trying to look at. They've looked at things like LTAFs [Long Term Asset Funds], they've looked at things like the charge cap, they've tried to think about fiscal incentives. There are all sorts of different factors that they've looked at.

But, ultimately, if the UK underperforms its peers as a global economy, then they just don't look that attractive as assets. So regardless of whether they're alternative or not, it's a bit of a difficult one.

George: Yeah, I totally get it from a UK perspective. Let's say: we're going to invest in growth industries, green industries, in the UK, and they will perform fantastically. And we're solving all the problems at once.

But this is not a forecast. It's a hypothetical quote, and it’s wishful thinking.

But I’m really interested in the dynamics What would you call it? A negotiation or an ongoing discussion between the government and other stakeholders?

Alyshia: Yeah. I'm not sure per se it's a negotiation. It's more just an ongoing discussion and like a meeting of minds. It’s more about trying to find ways to meet that sort of sweet spot of ultimate goals combined.

We would balance growth; we would balance member outcomes; we'd do that in a well-governed structure. There'd be loads of assets, there'd be a pipeline of investable assets, there'd be fiscal incentives, there would be a big industrial strategy with a green transition, all of these things. Ideally, all of these things would happen. Everyone is trying to find the piece of the puzzle that they can add to that UK growth dynamic.

George: But ultimately, what matters with this money is how do I retire, right? And, maybe there's something about, oh, I feel even better in my retirement because I've invested in green, meaningful projects.

But if I'm being cynical, the whole universe would have done very well by investing simply in the S&P 500 of US equities because they've done so well. And it's past performance, which doesn't imply future results.

What I keep from this is that it's a trade-off. Not a unilateral decision.

Alyshia: I think it's a dialogue. And I think also it's about those assets, it's finding the assets, finding the opportunities, and if they're there, pension schemes will have them. Pension schemes will never shy away from the things that they need.

And it's just that sometimes their needs are a bit more complex than it appears. And on an individual basis, some individuals are making choices about their savings, that are about green economy or about, whatever their ethical or otherwise views about, the future society in which they want to live. And that's not necessarily about return, though it could be. It's sometimes about their feelings towards that future society that they want to build. And some pension schemes are taking choices like that as well, but you can't have an ethical perspective in quite the same way as a very large investor. It's just not how it works. So I think it is about balancing the two sides of the coin. It's about finding those opportunities and those opportunities meeting the needs of savers. That's hard. It's not straightforward.

[I will publish the rest of our conversation, which covers DC / DB pension dynamics, the role of tech, the impact of behaviours and demographics, and more, in a separate newsletter.]

More about Alyshia Harring-Clark:

Related episodes:

Recent publications

I felt I needed to do something special to celebrate a YouTube milestone: 20,000 subscribers, so I’ll do a live session on YouTube this Friday, 22 November, 1 pm UK time.

Please join me and ask questions—it will be fun. ~~Or it could go terribly wrong. What if nobody shows up? What if people ask questions that I can’t answer? Or a technical issue?~~