I had a bit of a ding-dong with Guy Opperman earlier in the year when I disagreed with him about getting illiquid investments into our workplace pension
“Backing annuities – yes, backing DB scheme pensions -yes, but shoe-horned into DC workplace pensions – no minister!”
Well me and some of my chums are Teaming with Guy Opperman and his team again on Monday and I may have to eat my words.
It was like a divine finger pointing at me and a voice from the sky crying
“Pension Plowman – why dost thou persecute me?”
But enough of this sacrilegious nonsense.. we need our pensions to work harder for us.
There is around £2,000,000,000,ooo banged up in funded pensions in the UK and around half of it is in defined contribution pension schemes of one kind or another. Institutional investors are established in “built” Britain, but not in “building” Britain. Institutional investment is needed in the early stages of housing, infrastructure and the funding of SMEs.
Britain has an angel network that gets start-ups off the ground but as businesses and projects grow, investment is needed to bridge the finance gap and secure the foundations of the British economy.
This demand can be met by British pension funds, but of the trillion invested for our DC pensions, hardly a penny reaches small businesses while pension funding of infrastructure lags most of our OECD rivals, including our commonwealth partners Australia and Canada.
Meanwhile British Government debt is set to sky-rocket. This was the picture set by ONS at March this year, before the COVID measures were put in place.
Looking at these numbers, it’s clear that the money invested in DC, primarily in large cap global equities , could and should work harder to relieve pressure on the tax-payer to meet the demands of building Britain back.
Over recent months, I have become increasingly concerned by the need to put our money to work for this country’s regeneration and this is first of three reasons for my conversion.
We need to reorganize our workplace pensions to make their money matter
The current organization of DC workplace pensions does not make for fertile soil for illiquid investment. There are too many small DC pension schemes without the capacity to get direct access to private equity and infrastructure in a cost-efficient way while the charge cap has constrained even the larger schemes from investing in assets that might not survive a more inclusive cap – threatened since 2014.
The DWP’s consultation on “improving DC member outcomes” , addresses both the issue of small schemes and threats of an extension of a charge cap. If we accept the premise that the trillion in DC pensions could work harder if deployed to investment in illiquids, then the impediments to this happening look to be falling away.
The second step to my conversion has been the realisation that Government both recognize current barriers and that they are prepared to remove them.
The means of investment must in itself be value for money
The third and final step in my conversion has been through conversations with practitioners in this market who are looking to provide transparent structures for the investment of money into illiquids.
As I have been noting throughout the year, the practice of the private equity sector has been anything but transparent. Similarly , investment in infrastructure has been through funds with too little visibility of the underlying investment.
What is needed is a captive corporate vehicle regulated by FCA dedicated to supporting strategic partner pension funds. We do not need high levels of intermediation but direct access to the platform provided by this corporate vehicle.
In conversations with experts in this area, I have come to the conclusion that investment can be made efficiently and without the usual costs associated with alternative investments.
Now is the time
The congruence of
- Demand for capital to bounce Britain back from COVID-19 and the legacy of the credit crunch
- Demonstration of the serious intent of Government to make illiquid investment possible within DC schemes
- The emergence of transparent and cost-effective investment vehicles
has led to my conversion. I am no longer a persecutor of illiquids but a convert to their use – albeit in a benign regulatory climate through the right kind of investment vehicle.
Which is just as well.
The Government’s DC agenda is focused on introducing illiquids that deliver impact, through sound environmental policy , social purpose and good governance.
In recognizing the need for a change in the way our workplace pensions , the Government appears to be converting DC regulation to accommodate investment in the good economy.
Pension schemes are there to pay a pension.
They chase the highest risk adjusted returning assets, and many infrastructure projects do not have a Return on investment that would make it investable. When the project is investable, I can see no problem in finding investors, as for Hinkley Point C.
With regard to invest in startups, there are many investment funds that are specialised in funding for these businesses, and some pension schemes would invest a little into these funds. There is capital available, only this year private equity funds are raising $85 billion to pick up assets from bankrupt firms due to the pandemic.
What we need is a government backed compulsory CDC scheme that doesn’t need as much liquidity as a small trust backed scheme and can afford lower returns.
As a Trustee I don’t like being told to provide good returns and VFM (DC) or fast route to full funding (DB), to enable members to transfer out quickly if they wish (ie maintain liquidity), and to invest in infrastructure projects whilst simultaneously being responsible and accountable for the investment strategy and decisions.
Either government/regulator needs to mandate the investment strategy for the default fund or it wants us to make the decision as we see fit for our circumstances. It can’t have it both ways.