UK master trust providers have raised concerns over the possibility that the government will instruct pension funds to increase their investment allocations to productive assets, suggesting a voluntary approach instead.
The UK government and the City of London are in discussions with Mansion House compact signatories for next steps, considering anything from increasing investment in productive assets to making investments compulsory, according to people familiar with the topic.
The potential for the government to order pension funds to invest in productive assets was also a key theme at this month’s investment conference hosted by the Pensions and Lifetime Savings Association (PLSA) in Edinburgh. There, the UK pensions minister stressed he wants to increase investment in productive assets, promising a ‘clear roadmap’ for how all the changes dictated by the government will fit together.
Speaking at the conference, Lizzy Holliday, director of public affairs and policy at NOW: Pensions, said that fiduciary duty should be at the front of any investment decision but acknowledged that the interpretation of fiduciary duty is evolving.
NatWest Cushon and Eversheds Sutherland concluded earlier this month that from a legal perspective it is reasonable for pension scheme trustees to take into account members’ future standard of living in retirement when making investment decisions. This new legal advice effectively increases trustees’ ability to allocate assets to private markets in the UK, hence supporting the UK growth agenda.
More guidance needed
Holliday said there should be more guidance around how fiduciary duty should be interpreted, but she also said there needs to be a policy lever to achieve the level of investment the government is looking for.
She said that guidance – known as ‘disclose and explain’ – could be one way of encouraging pension funds to invest more in productive finance. She also acknowledged the government could look at ordering schemes to invest either through a “soft mandation” or “hard mandation”.
She said: “These are all possibilities on the table at the moment, given the urgency that the government views this issue with.”
However, Holliday warned that practicality and delivery also need to be considered.
“Pipeline of assets is crucial. If we move to a world of ‘mandation’ and there isn’t a pipeline of appropriate assets, or that pipeline isn’t sufficient for the amount of assets that government is looking to be invested, then we come across a really big problem,” she explained.
Jesal Mistry, head of DC investments governance and proposition at Legal & General, agreed with Holliday.
He said that if pension funds were asked to allocate a certain proportion of their assets to a particular asset class, there is a question of what happens if there are not enough opportunities to support that. He explained that this could lead to schemes investing in assets of less good quality that underdeliver in terms of returns, just to meet allocation requirements.
Assets and prices
Mistry added that this also risks creating a “bubble” in terms of assets and prices.
“The UK DC market is around £650bn. If we have to put 5-10% of that into private assets over a short period of time, it is going to create a lot of demand and not a lot of supply and drive up asset prices. This will create bubbles and reduce the value to the individual in terms of their return,” he noted.
He said investment should be “more voluntary” to avoid this.
James Lawrence, director of investment proposition at Smart Pension, agreed that ordering pension funds to invest in productive assets would be a “bad direction of travel” for the industry, explaining that investors are less likely to invest a certain way if they are being instructed to do so.
“They will do it eventually anyway, but mandating will cause lots of legal issues and fiduciary issues,” he said, adding: “It forces our hand in terms of where we invest. It means that we can’t necessarily pick the best opportunities for our members.”
However, Lawrence noted there are industry institutions that would quite like the government to tell them how to invest. “It closes the conversation. It exempts them from fiduciary duty for that aspect in particular as well.”
Opportunities
But he also acknowledged that the Mansion House reforms and the compact are already a sort of a “soft mandation”.
Any form of ordering schemes on how to invest will cause a rush of money into the same opportunities, which Lawrence said is going to cause issues for trustees.
“There’s going to be too much demand for the same opportunities across the UK. Everyone’s going to buy them at the wrong prices, and that’s going to cause issues with member impact,” he continued.
However, he does not believe the government actually wants to instruct pension funds on how to invest. “It’s a threat from the government, but it’s not really a threat they want to go through with,” he said.
“My gut feeling is they [the UK government] are not going to ‘mandate’ any time soon, but they might keep it on the table and do it in a few years’ time if pension schemes aren’t doing what they want to do.”
Read the digital edition of IPE’s latest magazine
No comments yet