Effectiveness: The PLSA welcomes the government’s commitment to spend £250 million through LIFTS to support DC pension scheme investment into our science and technology sector.
The LIFTS initiative builds on previous work by the pensions industry, such as the 2017 Patient Capital Review, in identifying and reducing barriers to investing in illiquid assets by institutional investors; in particular, defined contribution pension funds.
Pension fund participation will be dependent on the investment case of each proposition, given that they are rightly bound by their fiduciary duties to act in the interest of scheme members. Notwithstanding, if there is a robust investment case, the options for delivery will be effective in achieving the LIFTS objectives.
Options for delivery:
1. Investment collaboration and information exchange
2. Pari passu co-investment
3. Co-investment with capped returns for government
4. Management fee offset mechanism.
Options 3 and 4 appear more attractive for DC schemes. Both help make the financial case for investment in this sector. In a competitive market, options 1 and 2 are not going to provide a good investment case for DC schemes as the benefits are arguably not appealing enough to warrant interest. Option 3 is likely to support an investment case as it would help achieve the best risk-adjusted returns.
Many members voiced support for option 4, however the PLSA would urge the government to refine this option further. The initiative to offset the high annual management fees could result in DC pension schemes receiving a lower assessment score when applying the recently consulted upon Value for Money (VfM) framework.
Threshold: A threshold offered for proposed funds or structures, in terms of influencing a decision to put a proposal forward is welcome and members felt that the minimum portion of 50% would not have a significant impact either way.
Definition: The definition of qualifying investments was considered as reasonable, appropriate and in no way a hinderance by PLSA members. Although clarity is needed around the practicalities of checking and monitoring whether investments meet the definition of qualifying investments, we stress the need to avoid the introduction of an unnecessary administrative burden.
Participation: The PLSA is encouraging members to share their perspectives directly with the government, which will hopefully provide a more comprehensive view of the likelihood of DC schemes engaging with the initiative and putting forward proposals.
Download the PLSA’s full submission to the Long-Term Investment for Technology and Science (LIFTS) initiative here.
Nigel Peaple, Director Policy & Advocacy, PLSA, said: “It is sensible and reasonable for the Government to explore the degree of alignment between the long investment horizons of defined contribution pension schemes and open DB schemes with the capital needs of innovative UK companies.
“As an industry we have been arguing for the reduction of barriers for pensions investing in illiquid assets for more than five years. In 2017 the Patient Review Capital panel proposed several initiatives on this topic and the PLSA was pleased to take part in the Productive Finance group and to help produce guidance for pension funds on this topic last November.
“LIFTS provides another useful step forward in the Government’s set of measures to support pension fund investment in illiquid assets. Others include the Long-Term Asset Fund (LTAF), changes to the charge cap regarding performance fees, and new illiquid asset reporting requirements. We expect them to all be helpful, although Government should recognise that it will take many months, and maybe some years, before they will materially affect investment behaviour.
“It must be stressed, however, that although greater choice of investment vehicles and additional incentives strengthen the investment case, pension fund participation will be dependent on the investment case of each proposition, given that they are rightly bound by their fiduciary duties to act in the interests of scheme members.”
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