The tolls we pay for private equity

The Daily Mail have published a heavily spun article that seems to have come from the Treasury with the title

Chancellor Rishi Sunak to tap pensions for UK’s growth fund: Treasury draws up plan to help boost economy

Regular readers of this blog will know that the “improving member outcomes” (aka small scheme consolidation) initiative from the DWP is quite openly playing to this agenda.

The DWP and Treasury agree that for investment into the wider economy than is covered by the current indices used by workplace pension fund managers, means raising the fiduciary bar. That means driving money into 30 or less multi-employer workplace schemes and not many more single occupational schemes. The new bar for optimal scheme size seems to be rising from £100m to £5,000,000 million pounds.

So what in practice will this mean

The Mail interpret the Treasury’s big idea as a kind of sovereign wealth fund into which workplace pensions can invest. This is their interpretation of the Long Term Asset Fund or LTAF.

From what I can read, the LTAF is not a fund but a fund structure – what in the retail world is known as a wrapper. It wraps assets from private equity and venture capital to investments in diverse infrastructure projects. All these types of asset are seen as too hard, for conventional pooled funds to invest into.

The Treasury see an LTAF as a means to manage not just the assets , but their liquidity. It is a way round the permitted links regulations which constrain insured funds and the platforms they sit on, from holding these assets.

So from November, it will be a lot easier for the demi-monde of private funds investing from start up, through scale up to fully grown companies not listed on stock exchanges, to get funds from our retirement savings.

The dangers of PFI 2.0

The Government have been here before. The outsourcing of the build and maintenance of much of Britain’s infrastructure was handed to the private sector and funded by private equity throughout the early years of the decade. This has been called privatization by the back-door and much of it has proved controversial. Some contracts seem to have been awarded on a grace and favor basis and as with some football clubs, the private sector has achieved what it has through borrowing which is now debt on the tax-payer’s balance sheet. We have mortgaged our own assets rather than pay higher taxes.

The worry is that we now mortgage our retirements in the same way and that the major beneficiaries of LTAFs are those in finance able to run rings around us. This is the danger of pensions becoming PFI 2.0.

The role of trust , Trustees and good governance

The role of governance is to question the legitimacy of big ideas like “build back better” and ensure that what is invested in , benefits the members. Societal benefits are secondary to the fiduciary duty which is to improve member outcomes. Andrew Warwick-Thompson puts this well

A necessary dynamic

This dynamic between a Government keen to link retirement saving with regeneration and Trustees clear that this cannot mean pensioners paying the taxpayer’s bills is one that we are likely to hear a lot more from in months to come.

But it is the right argument to be having. And if we can find a way to use these LTAF’s, or to adapt the pooled fund permitted link regulations, so that member outcomes are improved, then this will be a major step forward.

But there remains a job of work for trustees to do and – like Government – I fear there are too few trustees asking the right questions and too many hanging on to their responsibilities for the wrong reasons.

So the DWP initiative to demand small schemes justify their existence is a necessary and worthwhile project which I support, while remaining wary of the dangers of PFI 2.0.