In a joint letter last week, UK prime minister Boris Johnson and chancellor Rishi Sunak challenged the nation’s asset managers to ignite an “investment big bang, to unlock the hundreds of billions of pounds sitting in UK institutional investors and use it to drive the UK’s recovery”.
Investment big bang were the only words bolded in the letter, a seemingly overblown comparison to former prime minister Margaret Thatcher’s 1986 Big Bang – the momentous day the London Stock Exchange was deregulated. This letter, on the other hand, had scant detail on the technicalities of how pension funds should invest in these assets, and the only new detail in it, as far as I could see, was the slogan.
The sentiment, however, is important. As the UK emerges from the pandemic and reconsiders some regulations following the departure from the European Union, the government is signalling that it plans to reshape the UK’s investment environment, by encouraging more risk taking by investors.
But it faces several barriers. The ‘challenge’ does (and should) not obligate pension funds to invest in illiquid assets. Ultimately, the trustees’ priority is to invest in the best interests of the scheme’s members, irrespective of what the government wants.
Most final salary pension schemes are now closed, de-risked and heavily invested in fixed income. These schemes are unlikely to reallocate capital into private companies and infrastructure, given their liabilities.
With defined contribution schemes, the investment risk has been placed squarely on individuals. Given the collapse of Woodford Investment Management and the suspension of various property funds, investors have become increasingly wary of illiquid assets. The government’s stance also jars with the recent regulatory emphasis of protecting private investors and not encouraging risk taking.
Another tension comes from the attractiveness of the assets. The government is trying to improve access by announcing that the 0.75 per cent ceiling on annual management fees for workers auto-enrolled into workplace pensions capped, to allow greater investment by schemes in illiquid assets, which are more expensive to manage, such as private equity, venture capital and infrastructure.
While I think this is welcome – it has not come without controversy. The pensions trade body issued a statement shortly after it was announced, warning that loosening the charge cap protecting millions of savers from high fees could wipe tens of thousands from their retirement funds.
The UK Infrastructure Bank, which launched earlier this year, provides new ways for pension funds to invest in this asset. The trouble is, a lot of specialist knowledge is required to work out if what it offers provides a good investment. Read Chris Dillow’s thoughts on the topic.
Greater investment in long-term assets is needed in the UK, but the government’s enthusiasm to channel assets into them begs the question as to why it is leaning on the private sector and not investing more of its own money, particularly in infrastructure. Perhaps that’s the reason pension schemes have been cautious in the first place.
