This investment generates the capital businesses need to expand their operations, hire more employees and develop new products and services. It also supports spending on infrastructure, renewable energy and social programmes.
However, over recent months there have been many public calls, from Government, stakeholders and the media, for pension funds to play a bigger role in providing additional capital to support growth in the UK economy, especially through increased direct investment in infrastructure, private markets and venture capital. Many commentators have suggested that the best way of achieving additional investment in UK growth assets is by undertaking radical and rapid consolidation of the pensions sector. We do not disagree that scale can have many advantages but, in our assessment, there are many quicker and simpler ways of achieving these objectives.
As the PLSA this week gathers its members in Edinburgh for its annual Investment Conference – the UK’s largest event focused on pension fund investment – the industry body has, in ‘Pensions & Growth: A Paper by the PLSA on Supporting Pension Investment in UK Growth,’ identified a dozen ways to make UK assets more appealing to pension funds.
The PLSA is already working closely with Government on these important issues and stands ready to provide extra support as needed.
Different types of pension fund have different investment needs
Pension funds are already large-scale owners of UK assets. Their needs are often based on whether they are DB or DC schemes, whether they are open or closed to new members, and their scale. While it is essential their investments meet the needs of savers and scheme members in line with the fiduciary duty on pension schemes to act in the interests of their members, this does not mean that they are not also able to be a source of capital for owning the right sort of UK investment assets, where they have the right risk-return characteristics.
The scale and distribution of assets across the pensions sector is expected to alter substantially over the next decade during which time the volume of assets in DC pension schemes is expected to double to around £1 trillion and the value of assets in the Local Government Pension Scheme is forecast to increase up to around £500bn. The value of private sector DB pension funds is expected to stay the same at today’s high value (£1.5 trillion) as most are closed to new members and future accrual, although as many as 500 schemes, managing assets of around £300bn, remain open. These landscape issues are important as schemes that are open and growing provide a good source of funds for further investment in growth-oriented UK assets.
A record of lifting barriers to investment in illiquid assets
The PLSA has been pleased to be involved in many government initiatives over recent years to remove barriers preventing schemes investing in growth-oriented assets – for example, illiquid assets such as venture capital, private equity and infrastructure – where doing so meets the needs of schemes and savers. Most recently it has participated in the Productive Finance Working Group, prior to this it worked with HMT’s Pension Investment Taskforce, and some years ago established the Pensions Infrastructure Platform.
Initiatives that would support pension fund investment in UK growth
The PLSA has identified the following opportunities to encourage all types of pension fund to invest further in UK growth. Importantly, these measures do not inhibit pension schemes’ ability to direct the investment of their members private savings, and do not dilute their fiduciary duty to scheme members.
• Suitable UK investment opportunities: It is essential to establish a rich, and continuous pipeline of enterprises needing investment for providers to bring to market and investors to choose from. The asset management industry should be encouraged to focus on sourcing UK opportunities and developing new investment funds and products (such as Long-term Asset Funds) which are appropriate to pension fund needs. The British Business Bank should be given an extended scope to support companies that need scale up capital, and to create or partner with funds that can bundle up the assets in a form that would be suitable for pension funds.
• Fiscal incentives: Initiatives like the Long-term Investment for Technology and Science (LIFTS), which alter the risk-return component of an investment, are appealing to pension funds provided the financial support from Government is of a long-term nature. Enhancing the tax treatment of domestic investments, as they do in France and Australia, merits exploration.
• Policy certainty: Setting out a clear plan for the future of the UK economy, for example on the Green Transition, will help draw pension fund investment and allow the UK to compete with non-domestic assets.
Measures specific to Defined Contribution funds include:
• Automatic Enrolment market – Employers & Corporate IFAs: The market should be incentivised to ensure that those purchasing workplace pensions, usually employers acting on advice from Corporate IFAs, balance net performance and costs, focusing on ultimate member outcomes. Government should consider whether the FCA rules on suitability of “DC default funds” and the regime applying to Corporate IFAs are fit for purpose.
• Automatic Enrolment market – Trustees & Investment Consultants: Where trustees make investment decisions, more should be done to ensure they have the skills necessary to the task and that they receive good advice from investment consultants. Consideration should be given as to how to enhance the skills of trustees and to bringing investment consultants within the regulatory perimeter of the FCA. (NB. The Master Trusts authorisation regime already requires that the trustees running the scheme have the necessary skills to manage complex investments.)
• Scale in DC Products: The quickest route to achieving volume and scale is by using “fund of fund” investment vehicles, for example, by including a mixture of lower risk growth assets, with some higher risk venture assets, to produce a more balanced investment, rather than further speeding up consolidation of DC. (DC consolidation is already happening both due to market pressures as large Master Trusts compete for business, and due to regulatory interventions from DWP/TPR pushing the smallest schemes to consolidate if they cannot demonstrate value for money.)
• Automatic Enrolment contribution levels: The Government should press ahead with its very welcome plan to increase AE contributions by removing the lower earnings limit and by starting automatic enrolment at age 18 instead of 22. Only by increasing the flow of new assets into DC pensions can we hope to provide more capital, and better retirement incomes, in the future. The Government should also consider further increases in contribution levels from 8% to 12% over the next decade.
Measures specific to the Local Government Pension Scheme (LGPS):
• The LGPS regime: The Scheme Advisory Board’s Good Governance review should be implemented as soon as possible. The government should work with Funds and Pools to understand the comparable international governance models to identify and establish best practice.
• Asset Pools: Following the enormous changes to the management of LGPS assets, which involved consolidating from around 90 separate pension funds into eight asset pools, the primary focus should now be on ensuring the current structures work well via the provision of guidance or regulation to support collaboration between and across funds and pools.
• Resources: More resource is required to ensure the effective operation of the LGPS, including within its supervisory bodies (DLUHC, SAB, TPR).
Measures specific to Defined Benefit funds:
• TPR DB Funding Code: More flexibility should be given to open DB pension funds than is currently planned in TPR’s DB Funding Code. Where supported by a strong employer covenant, open DB pension schemes should be able to carry long-term risks as part of their investment strategy, even as they approach maturity.
• Solvency II: Reforms are also needed to the solvency regime for insurers such that it would incentivise them to directly take over more illiquid assets held by pension funds as they approach buy-out. The operation of the current market encourages schemes to simplify their asset holdings, providing gilts and cash to the insurer, often incurring a ‘loss’ on their value.
Nigel Peaple, Director Policy & Advocacy, PLSA, said: “Pension funds play an essential role in supporting the UK economy. The UK has one of the most sophisticated and mature pensions systems in the world – it is a great British success story, that provides security to tens of millions of savers.
“How pension funds can play a bigger role in providing capital to support growth in the UK economy is an important question, and in our discussions with schemes there is a clear appetite to invest in the UK - where it is in the interests of savers.
“We have identified a dozen interventions to address these issues. These range from ensuring there is a suitable pipeline of investment opportunities, packaged up by the asset management industry and government so they are suitable for pension fund needs, to targeted regulatory and fiscal measures, including some related to the operation of the AE market. They build on current Government initiatives and address the needs of the pensions landscape as it is now.
“Pension funds are open to increasing investment in UK growth provided it is in the interests of the savers whose money we manage.”
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