IA Annual Conference 2024 - Chris Cummings, IA Chief Executive, keynote speech

Delivered: 5 June 2024 
Note: This is a drafted speech and may differ from the delivered version 

Good morning, welcome to the IA Annual Policy Conference.   

Today’s Annual Conference comes at a pivotal moment, as in just four weeks the country will go to the polls, and whoever wins, will be focused on a growth agenda that requires long-term investment to be front and centre. 

Our industry will be at the heart of those discussions. 

That is why today I want to set out the changes necessary if we are to meet that challenge.  In brief, we must seek to re-establish the importance of taking appropriate risk to deliver long-term returns for our customers – and by doing so, that will help to drive UK growth through efficient capital allocation.  

Working together, we can also make this journey about a UK tech-powered export engine that in turn drives greater overseas revenue, tax contribution and jobs in the years ahead. 

And the prize is not just economic, but societal.  

Today, I am setting out an agenda that changes, for the better, the relationship between our industry and society; leads to a greater understanding of the benefits that long-term investment brings; and ensures millions of citizens lead better lives in retirement because their pensions will deliver for them. 

So, how can we achieve this vision?   

My comments today touch on three areas: 

• Firstly, the challenge of safetyism and the need to think about harm differently. 
• Second, the implications of changing investment patterns and the impact on UK capital allocation. 
• And finally – most importantly - the ingredients for a new UK investment agenda that delivers for citizens and the economy. 

Safetyism and attitudes to harm 

My contention - and I am far from alone in this - is that over the past three decades, especially since the global financial crisis, a range of factors have combined to dampen the UK’s collective risk appetite.  

Put another way, we have moved too far towards a culture of safetyism, in which attempts to make some outcomes more certain have resulted in different risks emerging elsewhere. 

This has landed us in a place which does not align with the needs of the wider economy. Or indeed, I would argue, the longer-term financial interests of many of our fellow citizens. 

Let me give you two important examples in our world: 

DB pension de-risking has a strong internal logic for individual schemes, but has had significant external consequences for UK equity investment and the availability of UK risk capital, as we have discussed at length in recent years.    

As we moved eleven million citizens – highly successfully – into DC automatic enrolment schemes, a charge cap and forensic focus on costs were designed to protect savers who broadly do not think of themselves as investors and are carrying risks that DB was designed to avoid.  

But the focus on safetyism, expressed by a desire to control costs, ended up conflating price and value. We all know this is leading to too few opportunities to invest in higher growth areas, access the illiquidity premium, and in the longer term, there is a risk that future returns will be lower. 

As we digest the implications of this, there is a further aspect of safetyism that I think is important, which is about what I call the hierarchies of harm. 

We have seen that focus on harm shown predominantly through the lens of products and services regulation takes you down a path that appears to be the right one for consumer protection. 

However, this approach misses the greater harm. This is the harm of under-saving and under-provision for retirement among millions of our fellow citizens.  Briefly, the risk of doing nothing is worse than the risk of not getting perfectly right the product or advice when it comes to saving for a pension.   

Failing to address the Tier One harm of preventing pensioner poverty is worse than the focus on Tier Two harms where we seem to spend most regulatory effort. 

We have seen this play out in the decade following the implementation of the UK Retail Distribution Review.   

Aspects of RDR have had very positive consequences for those lucky enough to benefit from high quality financial advice, but has raised the barrier for many others who do not. 

UK capital allocation 

The need to rebalance our collective approach to risk, goes hand in hand with the second theme I want to discuss today – the role our industry plays in helping to drive growth and allocate capital on behalf of our customers. 

In the late 1980s and 1990s, there was a powerful alignment between private sector capital allocation, financial services regulation and the needs of the economy, with large DB schemes heavily invested in UK equities.    

Fast forward thirty years and the world looks very different.  

Investors have been able to benefit from increasing global diversification; allocation preferences have changed but the UK has a fight on its hands to justify its position in investor portfolios.  

Over the last fifteen years or so, UK equities have fallen from a third of UK assets under management to under 10%. 

Undoubtedly, UK investors have benefited from diversification. But the long-term impact of this shift had been disguised by the beneficial effect of international inward investment flows.   

But as those flows have been affected in recent years by shifts in confidence and changing competitive dynamics, the full extent of the challenge has become more obvious. 

Some of what we have been seeing across UK equity markets is arguably cyclical and will settle over time.  

However, when you combine the culture of safetyism and the challenges facing the UK economy and capital allocation, it is clear there are significant issues at work that will not be resolved by the cycle 

The UK therefore needs to look again at its approach to risk. And this brings me to the final section of my speech - our proposals for a new investment and growth agenda. 

A new risk capital and growth agenda 

Positively, I think this is a moment in time in which industry, regulators and policymakers are increasingly aligned on recognition of the problem and how to work together to fix it.  

Looking at what the FCA has said recently in areas such as the advice/guidance boundary, and the future of disclosure, a different path lies ahead.  

At Mansion House last Autumn, Nausicaa Delfas, Chief Executive of The Pensions Regulator, explicitly talked about the need to reframe the discussion around price and value in the DC pensions market: 

“In what other industry would you be buying a product or service based only on how cheap it is rather than also considering the quality of what’s provided?”, she asked. 

“That can’t be right,” she concluded. 

I couldn’t agree more.  

After a decade of commoditisation where we heard of mandates being won and lost on single basis points of price, the importance of this reframing cannot be overstated, particularly for the DC pensions market and also for the retail market. 

Equally, joint work on technology and tokenisation points to a real shared agenda on some critical aspects of competitiveness as technology, particularly AI, drives a period of exponential change for the industry and wider society.   

I’d like particularly to thank Michelle Scrimgeour, CEO of Legal and General Investment Management, who has been chairing the Technology Working Group of the HMT Asset Management Taskforce, for her leadership in this area. 

So how do we put all of this together? There are three key deliverables, and I am delighted to see these themes echoing and complementing a lot of the fantastic work that other individuals and organisations have been doing in this area, in particular Peter Horrell through TheCityUK.  

First, put investment front and centre in the pensions system.

Investment is the beating heart of our pensions system. 

We need to build on the momentum we are now seeing through Mansion House and other steps to drive a new investment agenda, with a focus on DC pensions investing in both public and private markets.  In this regard, I am delighted to see more Long-Term Asset Funds now emerging, but there is much more to this. 

Three things must happen that will underpin wider change:  

• We must continue to redefine value around long-term outcomes, not lowest price. 
• We need to move to more scale - not scale for the sake of it which simply commoditises with fewer, larger pension schemes. But sophisticated scale, learning from and improving on, the kind of schemes seen in North America and Australia.  
• We need to address contribution rates, which are simply too low to deliver the standard of living in later life our fellow citizens aspire to. We need to build on the phenomenal success of automatic enrolment to get DC pensions to the next level, using behavioural mechanisms such as auto-escalation, and great “save more tomorrow” campaigns.  

A rescaled system will have the firepower to start to redress the shortfall of capital for the U.K., even with more globalised strategies.  This can, and should, be achieved with Government support but without Government mandation – or directed capital – which we do not view as the right approach. 

Maximising these changes also requires a coherent approach to the structure of the pension system in the round. This includes the design of tax incentives, which are likely to be an area of focus for any new government.   We will say more about this in due course.   

Let me now turn to my second major theme: the need to reset retail investment policy to truly enable good outcomes in a Consumer Duty world. 

The way we all deal with the companies we buy products and services from has changed hugely over the last decades. The move from the high street to the online world has been profound, and the pace of change is increasing. Yet, the way that our customers, retail savers and investors have to deal with us still looks and feels old fashioned. It is time to rethink our industry and regulatory approaches to support today’s investors. 

I have already touched on specific examples where the system is not working and I am encouraged by recognition across the eco-system – policymakers, industry, and regulators - that we need to get to a better place.  

As the FCA itself declared in its 2021 consumer investment strategy: “We want more consumers to invest their money, when that is the right option for their circumstances”.   

What could help achieve this ambition? There are many ingredients - but let me highlight a couple which are both important and now increasingly within reach. 

We must have genuinely decision-useful information for customers as part of digitally – and almost certainly AI-enabled - delivery.  Let us leave behind the extraordinarily complex world of MiFID costs and charges, which even experts struggle to explain, towards a simpler but still fully accountable and transparent system. 

We must create more opportunities to have a different kind of conversation with customers to nudge behaviours.  The lack of clarity over the advice / guidance boundary has been an obstacle to better outcomes for years.    

In this regard, it is also positive to see a greater focus, from both the FCA and TPR, on the delivery of retirement income across the DC pensions market.   

Ensuring the wider tax and capital markets environment makes it attractive to invest and list in the U.K. 

Finally, there are some system-wide measures that could really move the dial on behaviours and perceptions about investing in the UK, both within the UK and outside.  

One obvious measure here would be abolition of U.K. stamp duty on shares, which is one of the highest in the world.  

We are also broadly supportive of wider reforms to the UK listing regime and to the stewardship process that is such an important part of our value add as long-term investors, and which attracts companies to the UK.  

In a post-Brexit world, the UK needs to signal clearly that it is ‘open for business’ in a way that preserves standards but adapts to changing times. 

Concluding comments 

To close, let’s be very clear about the importance of the shift in approach that is needed to help reset the approach to risk-taking and investment.   

Let’s leave behind safetyism and start a new journey together based on a different view of the road ahead.  I’ve set out the three key elements here today which can kick-start the process: 

Redefine the role of investment in our pensions system as DC becomes the new foundation. 

Reset retail market policy in a way that democratises and energises, while continuing to protect consumers appropriately. 

Put in place system-wide thinking on capital markets that builds ‘Brand UK’ both domestically and abroad. 

These things may not be easy, few important objectives ever are, but they are essential. 

It is my hope, my fervent belief, that we can bring a true democratisation to the UK capital market,  based on public policy that supports people saving and investing (if only to bring down the Welfare budget), a regulatory environment that supports well-calibrated risk-taking, and an industry that knows its clients expect innovation and an ease of doing business that they experience elsewhere. This societal shift will deliver a more financially resilient nation and one that will be respected as a global leader. 

We are all invested in this. I look forward to working with you to make it happen.   

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