Rishi Sunak is keen to see pension schemes invest to get Britain to its climate change commitments. This week the Treasury set out its financial services policy which ended with a promise
to encourage investment in long-term illiquid assets, such as infrastructure and venture capital, the Chancellor announced his ambition to have the UK’s first Long-Term Asset Fund (LTAF) launch within a year.
We know the DWP are taking steps to enable DC schemes to invest in such a fund and have issued a consultation on how to create larger DC schemes which can invest in less liquid funds. The DWP is also looking to tweak the charge cap rules to enable notoriously expensive illiquid asset classes to be used within the charge cap. Success for DC schemes is far from certain as liquidity in DC is a lot less certain (who knows when people will want their money?). Successfully embedding long term illiquid investment in collective defined benefit schemes sounds easier but will trustees commit to long term investment strategies if they are being regulated using short term measures?
Josephine Cumbo took to the tweets, to quiz the Pensions Regulator on how it might be resolving the seeming conflict between improving member security while supporting the Chancellor’s green objectives.
NEW: The UK’s Pensions Regulator has set out its position on Government efforts to encourage pension schemes to help the nation rebuild. (1/)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
On Monday, Chancellor Rishi Sunak said: “To encourage UK pension funds to direct more of their half a trillion pounds of capital towards our economic recovery I’m committing to the UK’s first Long-Term Asset Fund being up and running within a year.” (2/)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
I asked The Pensions Regulator how Trustees should respond to this drive by Govt to invest in infrastructure, like roads and bridges. Trustees have a duty to act in the best interests of members. Should nation building be prioritised over over maximising returns? (3/)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
The Pensions Regulator said:
“Investment to benefit members and investing in the economic recovery are not mutually exclusive.” (4/)— Josephine Cumbo (@JosephineCumbo) November 12, 2020
TPR: “Many trustees already consider Environmental, Social and Governance matters as part of their investment strategy, and invest in infrastructure as part of a diversified investment portfolio, seeking innovative ways to do so.” (5/)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
TPR: “In principle, investment in a fund such as the LTAF, and in infrastructure, can benefit both the investor and the broader economy in the longer term.” (6/)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
Outside of the UK, some countries are deterring pension schemes from investing in illiquid assets, like infrastructure (roads, bridges and airports) if better returns for members’ retirement funds can be achieved elsewhere. (7/)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
Australia is introducing a tougher requirement on trustees to act in the best *financial* interests of superannuation scheme members – which means schemes can still invest in infra but will have to explain to the Regulator if better returns could have achieved elsewhere. (8/)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
This new requirement is controversial, however, as schemes investing in infra do so for the long-term, with returns not immediately realisable. The decision to invest in infra may be sound but hard to justify to a Regulator assessing on yearly performance benchmarks.(8/8)
— Josephine Cumbo (@JosephineCumbo) November 12, 2020
Whether the Government wants to get DC or DB pensions investing in the LTAF , it is going to need to provide different messaging about the duration of pension liabilities. If trustees are planning to buy-out or transfer assets into a superfund then they are going to need assurance that any investment in the LTAF will be transferrable to whoever buys their liabilities out. Assets will need to be transferred in specie and its far from clear whether commercial organizations will want assets within the LTAF wrapper or indeed the assets at all.
Ironically, those DB schemes not looking to get bought out but which are either open to new members or future accrual are likely to be subject to the Pension Regulator’s “bespoke scheme guidance”. There is considerable concern in and outside parliament that these bespoke rules offer little more opportunity to invest in “patient capital” than the TPR’s fast track. This is why there are attempts being made to carve schemes that want to stay open from being subject to the strictures of the DB funding code. By escaping “bespoke”, these schemes would be much more free to invest in the LTAF (it is supposed).
Josephine Cumbo’s questions pose salient challenges for TPR’s DB funding code as well as to issues of member security they address directly. It is good to see invites coming out of TPR to attend briefings and even one on one meetings, this suggests that what appeared to be a slam dunk DB funding code consultation, may yet offer hope to schemes with longer time horizons to do as Rishi Sunak wants them to.
IS there a clash looming between DWP and HMT? If pensions are to invest in illiquid long-term assets, with potential to boost growth and deliver much better returns than gilts, the charge cap and daily pricing will need to be reconsidered for DC schemes and tPR funding code needs to be rethought in terms of ‘risk’ management. Managing pension risks is about balancing asset classes in a diversified portfolio, not just aiming to remove all risks other than in gilts (which clearly do still have risk relative to pension liabilities given the negative returns and lack of matching gilts)