Productive finance is a form of investment with slightly different definitions, but key aspects are that it:
Assets such as infrastructure, private equity, and renewables may be productive as they have long investment horizons. But this is a generalisation. Not every investment in one of these will generate economic growth and offer strong expected returns.
There is a wider issue as to whether we should focus on investments that will boost traditional GDP growth. Or is a broader measure more appropriate, taking account of environmental and social impacts?
Many productive assets are illiquid, making them suitable for those who don’t need frequent access to their money. This could include younger members of pension schemes, for example, but may also suit retirees looking for longer term (say 15 years) investments.
In July 2023 the then Chancellor announced a range of financial services reforms in his Mansion House speech. This included supporting an agreement between 9 of the UK’s largest defined contribution (DC) pension providers. The providers agreed to seek to allocate at least 5% of assets in their default funds to unlisted equities by 2030.
Labour’s general election manifesto included a commitment to increase investment from pension funds in UK markets. Labour also announced plans to set up an opt-in scheme for DC funds to invest a proportion of their assets into UK growth assets. This would be split between venture capital, small cap growth equity, and infrastructure investment.
The Labour government plans to pursue workplace pension scheme consolidation in order to deliver better returns for UK savers and greater productive investment for the country.
In 2024, a consultation by the Conservative UK government on defined benefit (DB) pensions explored making it easier for DB schemes in surplus to:
A surplus could offer the opportunity to invest more in productive assets without requiring a fundamental change of investment strategy.
These proposals are relevant to larger schemes in surplus, which are able to envisage alternatives to arranging a buy out with an insurer – such as consolidation or running on.
However, for schemes looking to buy out, there is limited appetite from insurers for productive assets. That’s because under the Solvency UK regime, they may need to hold more capital if these assets don’t qualify for the matching adjustment.
Since the start of 2020, the IFoA’s Great Risk Transfer campaign has been exploring a trend to transfer risks from institutions – such as employers, the state, and financial services providers – to individuals, who are often not well-placed to manage them.
Our Interim Report highlighted evidence of this shift in areas including pensions, insurance, and employment.
Our campaign to date has demonstrated that influential figures in finance, politics, academia, and elsewhere recognise the Great Risk Transfer as a pressing and important issue. We continue to seek opportunities to influence or work with others to implement our recommendations.
We think there are opportunities to shift the prime responsibility for certain risks back towards institutions, easing consumers’ share of the burden in managing those risks. Our recommendations focus specifically on pensions and insurance, in which actuaries’ skills and experience enable them to contribute to solutions. The pensions recommendations include the development of Collective Defined Contribution schemes and investment pathways for drawing down pension pots. In insurance, we have been engaging with the industry on defining a minimum level of insurance protection needed by all.
In the UK, many individuals’ employers no longer provide access to defined benefit pensions. Although Defined Contribution (DC) pensions might be a suitable alternative for many individuals, in their current form they would not meet well the needs of those who want a regular retirement income for the whole of life, but do not want to meet the expense of an insured annuity.
CDC is a new type of pension scheme into which employers and employees pay a fixed rate of contributions, and members are paid pensions with variable increases (and possible, but rare decreases). These are risk-sharing (or target pension) plans widely used in several other countries including Canada and Holland. The Pension Schemes Act 2021 provided the primary legislative framework for CDC schemes in the UK.
Regulations laid before Parliament in December 2021 have provided the foundation for CDC schemes to be introduced in Great Britain. In the coming months, attention will turn to the possibility of establishing multi-employer CDC schemes amongst other variations.
Good pension provision represents a puzzle about how to provide an income that cost-effectively meets an individual’s needs in retirement when those needs and the individual’s lifespan are unknown in advance. One of the options we support is the provision of pensions through CDC pension schemes. These give individuals an income for life in retirement, at a fixed cost for employers. They come with no guarantee of benefit levels but are invested to give an expectation of cost-effective pensions. We see this as only the beginning: the IFoA is seeking further government action to show employers that CDC is an attractive alternative to DC schemes, address concerns employers may have, such as regulatory burdens and costs, and to support the introduction of multi-employer and master trust CDC schemes to provide employees of smaller organisations with access to CDC.
Recent developments in the UK pension system have forced individuals to take increasing responsibility for their retirement savings. However, eight in 10 people with a defined contribution (DC) pension have not given much thought to how much they should be paying into it to maintain a reasonable standard of living when they retire. Pensions dashboards hope to enable individuals to access information online, securely and all in one place, about their multiple pension savings, including State Pension. This will support better planning for retirement and growing financial wellbeing. Dashboards will also help people to reconnect with any lost pension pots.
The Money and Pensions Service (MaPS) established the Pensions Dashboards Programme (PDP) to develop the governance framework and infrastructure that will make pensions dashboards work. Read the PDP’s progress reports.
The IFoA welcomes any tools such as pensions dashboards that help individuals better understand their pension savings. However, dashboards should be seen as the first step towards communication that aids financial education and truly engages savers with retirement planning. Dashboards alone will not achieve this aim, and we believe significantly more promotion by the government, employers, and pension providers is needed. Society has much to gain from an improved savings culture, and the government should play a central role in making this happen.
Consistency will be key to making the dashboard a success: in how data is collected and presented, between different types of DB, DC, CDC, insured arrangements, and state pensions. What appears on the dashboard must also be consistent with other pensions communication from trustees, providers, and advisors. Considerable enthusiasm and effort are already being invested by the government and the pensions industry in bringing pensions dashboards to life.
We have some concerns about the current timescales and will welcome further guidance on interim connection deadlines. But we continue to be fully supportive of the aims of pensions dashboards. We firmly believe they will significantly increase savers’ engagement with their pension savings, leading to better communications, higher contributions, and improved outcomes for members and providers.
As the population grows and individuals live longer, more and more people require long-term care in later life. The Care Act 2014 embodies the most recent attempt to reform the social care system in England. But despite making its way onto the statute book, the reforms were subsequently delayed in 2016. They have since been shelved in favour of new legislative proposals.
With a complex funding system continuously under government review, many individuals find it difficult to understand the potential social care costs they will be expected to meet later in life. As a result, those individuals are not sufficiently prepared.
Furthermore, there is a hidden cross-subsidy in the care sector, in that privately funded provision subsidises under-payment from social service departments. In turn, it also drives down wage levels in the sector to unsustainable levels. That means care homes often find it difficult to meet staffing levels required to provide adequate care. The entire sector urgently needs more funding. Long-term sustainable cross-party political agreement is necessary, however hard it is to achieve.
With the NHS under increasing budgetary strain, the government must set out a clear strategy for tackling social care in both the short and the long term.
Should the government revisit plans to introduce a lifetime cap on care costs for adults in England, it should reconsider the proposed £86,000 cap. A significant proportion of people who pay for their own care in England won’t benefit from a cap at this level.
Pensions Policy Institute analysis shows that the people most likely to benefit from a social care cap have the highest levels of income and assets in the population. Government funds are under significant strain. So, would it be more appropriate to encourage people with the means to pay to take out insurance against the risk, rather than the state stepping in?
The government should introduce a more generous means test. This would widen access to the state-funded system of care and support for pensioner households with modest assets and wealth.
Under the most recent planned care reforms the upper threshold means-test limit was expected to increase from £23,250 to £100,000.
It is unlikely that there will be a universal ‘silver bullet’ product solution. However, there are a range of insurance and savings-based financial products already on the market that could be suitable for parts of the working population. Suitability depends on factors like their wealth, assets, risk appetite, and health. These products include INAs, life insurance-style care riders, pensions, and equity release.