Webb: relaxing DC charge cap ‘wrong way to encourage green investment’
The former pensions minister has instead called for the UK government to provide seed funding to encourage investment in green infrastructure and renewables.
Former UK pensions minister Sir Steve Webb has said that the British government “tends to misdiagnose the problem” when it comes to encouraging pension schemes to invest in green infrastructure and renewable energy.
Webb told Net Zero Investor that the then UK chancellor’s decision to go ahead with the relaxation of the charge cap was the wrong approach. The relaxation of the cap was confirmed in Kwasi Kwarteng’s mini-budget on 23 September and was intended to encourage defined contribution (DC) pension schemes to invest in illiquid assets, such as renewable energy.
Kwarteng was subsequently sacked as chancellor on 14 October, with UK prime minister Liz Truss reversing plans to abandon a scheduled increase in corporation tax.
The charge cap, currently set by the UK government at 0.75%, is the annual amount that can be charged to savers within DC schemes. In his mini-budget, Kwarteng said that the government would legislate to remove “well-designed” performance fees from the cap.
But, according to Webb: “I think the government tends to misdiagnose the problem. The government has obviously lobbied on, for example, the charge cap.
“Relaxing the charge cap is fixing the wrong problem. When you talk to investors, they say, ‘we would like to invest in more of these kinds of things [illiquid assets] as it’s long term’, but often there are a lack of things ready to invest in.”
Webb was UK pensions minister from 2010 to 2015 and is currently a partner at consultants LCP. He warned that fund managers are reluctant to invest in green infrastructure or renewable energy that is not “up and running steady”, as pension schemes do not want to take that risk.
Therefore, he suggested that to encourage investors to allocate assets to the energy transition, the UK government needed to provide “seed funding” to invest in green infrastructure and renewables.
Relaxing the charge cap is fixing the wrong problem. Investors say they would like to invest in more illiquid assets, but often there are a lack of things ready to invest in.
Barriers to green investment
“Rather than write letters and demand that the pensions industry invests in illiquid [assets]. They [the UK government] should actually sit down with the pension schemes and investigate what the real barriers are,” he added.
Webb also highlighted that changing the funding regime of defined benefit (DB) pension schemes could potentially force many of them to de-risk. This could ultimately force schemes that had “a long-term horizon to bring that forward, which undermines this very goal” of net zero.
“So, we all want people's pensions to be paid, but forcing premature de-risking of DB pension schemes doesn't create the money for long-term investment,” he added.
Webb also highlighted that the recent economic turmoil in the UK’s financial markets could start to impact net-zero commitments, as closed DB schemes could potentially start pulling out of their investments in illiquid assets.
“The bulk of money today is in closed private sector DB, and that's where we're going to lose the infrastructure and the illiquid investments they've got. They may be thinking, can we work our way out of that?
“The nature of illiquid [assets] is you can't pull out overnight on the whole. So, it hasn't happened yet, but you might be more reluctant to enter into new deals,” he added.
Although, Webb detailed that this process was starting to happen anyway, as when pension schemes mature “there's a temptation to move out of illiquid [assets]”.
Market turmoil
Following the mini-budget, the pound fell to record lows and chaos in the bond market threatened the UK’s financial stability. This meant some pension funds came close to collapse, which provoked the Bank of England (BoE) to intervene and offer to buy up to £65bn of government debt until 14 October.
Speaking at the Pensions and Lifetime Savings Association’s annual conference, Webb said that in light of the economic turmoil in the markets “ironically the focus is all going to be on DB”. But he suggested that the real concern is the impact the turmoil will have on DC pension schemes and individual households.
He told Net Zero Investor: “We're talking about all the excitements about DB pension [schemes] that have got £2trn sitting behind them. They were never going bust.
“But if you are coming up to retirement and sitting on a DC pot that you’re to use to fund your retirement and you weren’t going to buy an annuity, your pot is probably going down 30% this year.”
Hence, Webb stated that due to the turmoil many people may need to postpone their retirement, or pensioners already in retirement may need to draw on their savings.
Photo credit: Daniel Graves Photography
