HMT and PLSA need a compelling reason for employers to take investment risk

“Pension funds are open to increasing investment in UK growth provided it is in the interests of the savers whose money we manage.”

This is how Nigel Peaple, PLSA’s senior policy wonk (Director of Policy and Advocacy, concluded a call to action to get pensions investing again

The facts are that UK pension schemes don’t invest much in the UK, don’t invest for growth and in many cases don’t invest at all. Why should they, they are agents of their sponsors and governed by a risk-averse Regulator.

Rather than investing in UK growth, they match liabilities to assets using the gilt markets to reduce risks to sponsoring employers of nasty surprises. Where there is investment, it is to play catch up and as many speakers at yesterday’s conference confirmed, most pension schemes are no longer having to take any risk to meet their liabilities, such is the benefit they get from the misery of high interest rates.

The 12 interventions the PLSA are calling for , are beneficial nudges  to get pensions to take more risk, both with the DB schemes, which are the primary concern of its investment conference, and in DC schemes – which don’t seem to be getting much of a look in. They stop short of calling on TPR to scrap its DB funding code and certainly don’t embrace the idea that DC schemes should be mandated to invest in the UK in growth stocks

These “interventions” range from making suitable investment opportunities available to mandating that those advising on pensions fall under the auspices of the FCA. They call on Government to mandate savers pay more into pensions through auto-enrolment and that the big DC schemes swallow up small ones to get scale. They look to further fiscal incentives to make investment in UK growth more attractive and – in the only area where substantial investment in UK growth is happening (LGPS) they call on more regulatory resource. A lot of their agenda is frankly a little self-serving, they are not interventions that encourage employers to take more risk either with DB or DC pensions.

Irrational exuberance from the Treasury

Treasury calls for growth still lack credibility

This long wish list was delivered as Treasury Minister Andrew Griffiths turned up on a screen demanding that pension schemes invested in UK growth as a celebration of their capacity to take risk.

A less likely set of entrepreneurs than those assembled in Edinburgh it would be hard to imagine. After decades of being taught to eliminate risk and demand more from employers to replace the opportunities of investment growth, delegates looked decidedly unimpressed with having the role of venture capitalists , thrust upon them,

Those journalists I spoke to sensed this, and nobody was that impressed that the best the Government could do was to send a pre-recorded video with no opportunity to comment.

The mood in the hall wasn’t helped by Danny Blanchflower, former BOE rockstar, telling the conference that Andrew Bailey & Co were getting it all wrong and prolonging the agony for British industry and mortgage holders by maintaining interest rates at current levels.

Of course , if Britain was to follow what America is set to do and return interest rates to QE levels, the pension schemes which are now sitting in theoretical surplus would be left like the naked man when the tide goes out. As Emma Douglas said, never has such a gloomy message been delivered in such an upbeat way. For pension schemes to consider investing for growth, they need interest rates to remain high. Mr Blanchflower was met with tepid support,

The conference’s first day also contained an “everything has changed, nothing has changed” session from a variety of proponents of LDI and a representative of the FCA who had little she could say, so triumphal were the assembled trustees , consultants and LDI managers. They were basking in the newly found solvency of DB pension schemes that had suffered a £500bn haircut in their assets in 2022 in meeting collateral calls to remain 100% hedged. There was no dissenting voice – LDI will it seems roll on, this time buffered by cash to insulate the hedge from the next liquidity crisis.

Dissenting voices were few and far between. John Hamilton of Stagecoach joined a call from the hall that the Government was looking to nationalise pensions by explaining that pensions were already nationalised. The vast majority of future payments of pensions in corporate DB will be backed not from investments but from Government securities.

The mood of the PLSA Investment Conference

Right now the PLSA has a lot going for it. Pension Schemes in surplus, markets holding up, interest rates set to remain high and a notable absence of CBI style scandal .

But it is a fragile mood, the events of 2022 seem to have dented confidence, the old certainty that there was not enough in the pot to pay the pensions has been swapped with an unease, that despite seeming solvency, asset coverage of future payments has been diminished. Nobody feels in the mood to celebrate as Andrew Griffiths was demanding.

We will hear today and tomorrow how ready DC schemes are to embrace the new investment paradigm. Right now, most master trusts (other than Nest) are talking a good game but only dipping their toes in the water with regards UK growth.  The PLSA’s policy measures to get DC investing miss the central problem , that employers do not want their members in anything but passive funds , priced at a few basis points.

Unless the sponsors of DC and DB schemes buy the Andrew Griffiths message, there is precious little that trustees, consultants and fund managers can do. What was missing yesterday was any reason employers will want any more risk in their pension schemes than they currently have.  Currently employers are quite happy taking no risk – they need to be bought into the UK Growth message and they aren’t in the room.

The Government’s recent Growth plan is being replaced by another

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to HMT and PLSA need a compelling reason for employers to take investment risk

  1. John Mather says:

    There are more fundamental problems to face beyond justifying the existence of the players each taking a bite out if funded pensions

    Are both current policy and economic theory fit for purpose?
    Are we about to repeat history and have a significant asset bubble correction?
    Will the UK find the productivity to manage it’s increasing deficit?

    Maybe we should listen to proven wisdom

    One example

  2. jnamdoc says:

    Pension schemes operate in a tax privileged regime – the reason for that is as an incentive by Govt to “invest”. Investing is risky, but it is so important it needs to be supported by the tax incentives. Holding a chunk of gilts (as a hedge) provides little investment growth.
    Tax rules could be very easily be changed such that the tax privileges only persists for schemes who hold a threshold [5-10%] of [infra/innovation/sustainable/social/growth] investment assets?

    • Peter Wilson says:

      The reason for a tax incentive is to encourage people to save for their old age so that they are not a burden on the state. Nothing to do with investment, although investing that money would be sensible.

      • jnamdoc says:

        I think you are confusing the tax relief for the saver on the way in. The tax privileged regime in Scheme is to support investment risk.
        And as for not being a burden on the State … the truly colossal level of DB pensions that will now rely on servicing from gilts, means that the State (ie future tax payers) will now be paying the lion’s share of private sector pensions…

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