Speech by the Financial Secretary to the Treasury.
[Check against delivery] [2,681 words]
It’s a pleasure to be here to speak with you today, and to discuss with you the challenges and opportunities that face the pension fund industry in the coming years in a climate of market uncertainty and huge regulatory change.
These challenges and opportunities are partly rooted in the macro-economic environment that we face today but also flow from the radical reforms we need to make to create a more sustainable and stable model of economic growth.
Pension funds are both beneficiaries of these reforms but can also help us drive them through.
Of course our reforms are set against the backdrop of continued turbulence in the global economy. We all here know that recovery from the worst financial crisis in a century, from a debt-fuelled boom and bust, would be prolonged and difficult.
But this summer we’ve seen volatility in worldwide equity markets that we haven’t seen since 2008.
Volatility driven by market anxiety on sovereign debt levels … in particular the continued crisis in the Eurozone and the historic downgrade of US debt. We all recognise that the UK is not immune to that volatility.
Over 40% of our trade is with the Eurozone and we export more to Ireland than we do to Brazil, Russia, India and China combined.
So instability in the Eurozone has an impact on our economy which is why we believe that Eurozone countries need to tackle that instability and that means in part be recognising the remorseless logic that monetary union must be underpinned by greater fiscal integration.
Whilst as I said we are not immune to that volatility, in one key respect we are in a considerably better position.
Whilst other countries have struggled to take a firm grip on their debts and deficits, we have taken decisive action to eliminate the structural current budget deficit by the end of this parliament.
It’s an approach endorsed by the IMF, the OECD, and credit rating agencies with S&P deciding to take the country’s AAA rating off the negative watch that we had inherited.
And it makes a real difference to businesses and households across the country who are benefiting from some of the lowest UK market interest rates on record.
But deficit reduction is just a start to clearing the economic mess we inherited.
We still have a long way to go to rebalance our economy from one propelled by debt-fuelled consumption, to one sustained by enterprise, export and investment - creating that new model of stable and sustainable economic growth.
And of course the pensions industry is critical to that vision. The NAPF members alone provide pensions to nearly 15 million people and with combined assets of nearly £800 billion are key players in the economy as holders of corporate debt and equity, as well as sovereign debt.
Your investment in the UK economy can drive economic change and that change should generate more stable and sustainable returns, benefitting Britain’s pensioners.
And the opportunities for investment will grow in the coming years as we embark on a programme to invest £200 billion in the UK’s key infrastructure needs.
For years we have been lagging behind our international competitors on the quality of our infrastructure…ranked lower than France, Germany and Spain by the World Economic Forum.
That is why we have brought a renewed focus on infrastructure in this Government by publishing our National Infrastructure Plan which set out our vision for the infrastructure that our nation needs.
But we also have to make it easier for private investors to seize the opportunities on offer.
That means reforming our planning rules to remove tortuous and stifling obstacles to investment which currently cost the UK as much as £3 billion a year.
Through the National Planning Policy Framework we are streamlining the system and embedding a presumption in favour of sustainable development to support the investment we need to grow.
We are also ensuring that all planning applications and appeals will be processed in 12 months, and that major infrastructure projects will be fast-tracked through the Major Infrastructure Planning Unit.
By reducing the cost of planning, we can improve the returns for investors, create new opportunities for development and strengthen the economy.
But we are also providing greater certainty and transparency to the industry. The industry needs a visible and continuous pipeline of work, not erratic stop-start investment programmes.
That’s why, as well as the National Infrastructure Plan we are producing National Policy Statements for each of our major infrastructure sectors. And we will also publish every quarter, a rolling two year programme of projects where public sector funding has been agreed.
We are committed to making it easier for investors to respond to the range of infrastructure opportunities across the country. Of course, we recognise that infrastructure is a broad asset class, that all projects will not be suitable for all investors, and that historical investment management models may not be up to the challenge.
We therefore welcome the news that UK pension funds are beginning to build their own teams and develop their capacity to look at directly investing in projects.
And at a time of widespread market anxiety, when returns on most types of investment are extremely volatile and uncertain, investors across the board are looking to de-risk and secure long dated income producing assets.
Infrastructure investment is has the potential to offer those secure, sustainable and strong returns that investors are looking for.
But just as investment is vital to rebalancing our economy, so is saving.
Before the financial crisis, one in four households had no liquid savings
UK household debt was almost 100% of GDP compared to 61% in Germany and 50% in France
And even today, almost 40% of people do not have any pension savings
If we want to build an economy more strongly built on the back of investment, we have to create the conditions to encourage people to save.
We have to ensure that a greater and broader spectrum of society have the opportunities, capacity and trust in the system to take personal responsibility for saving.
In the past, politicians and the industry have sought to drive savings through tax incentives, whilst this has been a powerful way to encourage people to save that for some this is not sufficient. This is why we are using insights from behavioural economics to encourage savings.
For that reason we have launched the Money Advice Service to ensure that consumers have the skills and understanding to engage with the financial system.
Its Financial Healthcheck will help create a new social norm around savings by setting out what families need based on their circumstances. And we also hope to soon announce the next steps in developing simple financial products to improve choice and confidence in financial products.
On pensions, again using insights from behavioural economics, we are introducing a duty of automatic-enrolment on employers, meaning that they will have to provide eligible employees with a minimum quality pension scheme from 2012.
That means another 5 to 8 million people will be able to start saving, or save more into a workplace pension scheme.
And we have established the National Employment Savings Trust to provide a low-cost pension scheme for smaller employers and between 2-5 million lower earners not currently served by the market.
These are changes to pensions saving that have been welcomed across the industry, including the NAPF. Indeed I welcome the report by the Workplace Retirement Income Commission set up by the NAPF, and commend the expert and valuable insights it provides into the nation’s pensions situation.
But as well as the growth challenge, we face a sizeable task in reforming our financial sector to remedy the regulatory failures of the last crisis that cost taxpayers and the economy billions of pounds.
At the same time we cannot succumb to excessive, inefficient and knee-jerk reform.
We need to ensure that institutional investors, pension funds, still have the capacity, opportunity and incentive to continue investing in the UK even as we embark on the most ambitious agenda of regulatory and financial sector reform for decades.
Whilst this is not the time to go into the detail of our regulatory reforms, it is worth making this point.
The structure and style of regulation played its role in the build up of instability in financial markets and a loss of confidence in saving and investment. Our reforms will help address this.
The Financial Policy Committee will be tasked with identifying and responding to threats to financial stability.
The PRA will have a clear mandate to supervise with safety and soundness of banks and insurers and matching this responsibility with a style of regulation based on judgement and discretion.
The FCA with its focus on conduct issues will have a new range of powers to shape and intervene in retail markets.
We believe that these reforms will help provide the foundation for more stable and sustainable financial sector which will underpin and not undermine the broader economy.
Of course we all know that domestic regulation is not enough. Financial services are a truly global industry and regulation must reflect that fact.
But at the same time we must strike the right balance between enhancing financial stability and promoting investment providing the economic growth Europe needs and improving returns to investors.
And I want to speak about three key areas of international debate that are of direct importance to the Pensions Industry.
Firstly, regulation of the global derivatives market. We already have a general consensus through the G20 that we need to move towards the central clearing of derivatives to increase market stability.
It is vital that we implement rules that are consistent and uniform across borders and products.
The UK, like the US, believes that the central clearing obligation must apply to all derivatives and not just OTC, and we continue to argue our case through the EU in our negotiations on EMIR.
But we have also recognised the significant and disproportionate cost that the clearing obligation could have on Pension Funds and their beneficiaries if they are forced to post variation margin under existing clearing models.
In light of this, we have been pushing for an exemption from the clearing obligation until a technical solution is found.
The second key area of European negotiation is the EU MiFID review. Whilst MiFID has successfully increased competition in equity markets forcing down costs for investors and raising returns we cannot simply copy the model across to the bond and derivative markets without a proper evidence base.
These are fundamentally different markets, and a drive to transparency could have unintended and costly consequences if pushed too far.
We are also leading the way to understand how the Directive should respond to developments such as High Frequency Trading.
Through our Foresight project we are undertaking a detailed assessment of how computer trading may evolve, how this will affect market quality and stability, and how we avoid regulation that comes at the expense of liquid, efficient and competitive markets and the interests of investors
Finally, the big ticket item is the role of the new European Insurance and Occupational Pensions Authority, and last year’s EC Green Paper on European pensions systems and the Commission’s review on the IORP Directive.
We are keen to work with EIOPA as it develops, and ensure that it delivers higher and consistent standards of supervision across the EU, and helps to foster a deeper, single European market.
But at the same time we strongly oppose any new transfer of powers from the UK Government to EIOPA or the European Commission over regulation or supervision of funded pension schemes. And I know this is a position that is shared with the UK industry.
We believe that it is the primary responsibility of member states to regulate retirement savings in a way that works best for our citizens.
Pension schemes are vastly different across the EU member states and the rules around member protection and solvency requirements need to reflect that fact.
We believe that current EU legislation already strikes the right balance between EU and national social and labour laws.
The Open Method of Communication remains the best way to continue this: sharing information; promoting good practice; and creating a co-ordinated framework across the EU.
The detailed, prescriptive, approach of Solvency II would simply not be appropriate in this arena.
We will continue to work closely with you, the industry, social partners and consumers to ensure that any proposals that may emerge on pensions recognise the different needs of Member States.
We are grateful to you at NAPF for your work with Treasury and DWP so far: and look forward to continuing our engagement over the coming months, starting with further discussions on EIOPA’s responses to the Commission’s Call for Advice next month.
But, regulation and requirement can only go so far to securing a safer financial system. Ultimately Chief Executives, Board Members and indeed shareholders, must have the power to assess risk and take decisions for which they are accountable.
Investors can play a key role here but we see today different models of shareholder engagement. There is the traditional model of shareholders as a stewards - the people who hold management to account through engagement with boards.
But increasingly we see that as financial markets and new products develop, accountability is exercised through short-term trading of shares as opposed to long term stewardship.
We have sought to work with investors and companies to strengthen the corporate governance framework and provide greater opportunities for stewardship over a sustained period.
The Walker Review of corporate governance of UK banks led to a thorough revision of the Corporate Governance Code to promote better informed, more focused and effectively led boards, and to a Stewardship Code to encourage institutional investors to exercise their governance responsibilities more effectively and transparently.
These improvements have been complemented by FSA’s strengthening of its Significant Influence Function reviews of prospective board members, and its introduction of the FSA Remuneration Code, which establishes a firm link between executive pay and effective risk management.
The publication yesterday of a BIS consultation on measures to improve the transparency of pay, and of a discussion paper on executive pay, takes this further. These will promote informed debate on the incentivisation and accountability of company managers for long-term performance.
Institutional shareholders, such as pension funds, are responsible for holding directors to account for corporate performance and pay, and we look to forward to engaging with you on how we can strengthen your ability to discharge this role.
But as well as strengthening corporate governance, we have also looked at a more fundamental question around that debate around stewardship and trading.
Vince Cable the Secretary of State for Business has commissioned Professor John Kay to conduct an independent review of UK equity markets, examining the question of how equity investment can better support the long term interests of companies, as well as in this case, pension fund members themselves.
Improving the long-term productivity of investment in the UK underpins the Kay review, and is at the heart of the Coalition’s growth agenda. Influencing and permeating all aspects of Government policy.
The pension fund industry is a crucial hub in our economy, a vital engine for savings and investment across the UK.
In a climate of global economic anxiety and vast regulatory reform, there is a lot of uncertainty confronting the investment community, and it is vital that we support the industry as we tread the difficult path to economic recovery.
We believe that the reforms we are pursuing align closely with the interests of pension funds and their members: stable and sustainable growth; a broadly based UK economy with modern infrastructure; and a stronger, more resilient financial services sector that underpins not undermines the economy.
This alignment of interests should provide a strong incentive to you to support reforms that will deliver this new model of economic growth. I look forward to working with you to help achieve these goals.