Will private markets raise returns on our pension savings? The case is ,as yet, unproven

The cynical view is that having run out of runway on the private finance initiative, the Government has turned to pensions to finance the transformation of UK infrastructure and fund the growth needed in companies that can make a difference to our lives and the economy. The sceptics ask – “is that what our pensions are for?”

The alternative view is to consider the funder of the pensions and the obligations on them to sufficiently resource the promise, either though a collective or a series of individual pots. While defined contribution pension schemes don’t have an obligation to pay a pension, there is a fiduciary obligation to look after the interests of the saver and maximised the pot,

The question then becomes whether investments in private markets , most particularly in the equity of long-term projects achieves more than remaining in listed markets (primarily through passive investment)?

There is yet to be a cogent argument made for private investments from the Government.

That argument has to be based on the opportunity cost of not investing in the assets that are promoted in the Tony Blair Institute’s report, by the City’s Lord Mayor, Nicholas Lyons and last week by the Resolution Foundation

Why not?

Sadly, we have no way of knowing what we are missing out on, as there is so little published information from organisations that have invested in private UK growth stocks, of the “raised returns” that we are told arise.

I love Callum Stewart’s 10-10-10 rule

“If you are able to spend an extra 10 basis points, you can support a 10% allocation to diversify illiquid solutions, which can improve retirement outcomes by at least 10%.”

But asset managers seem reluctant to follow through with instances of where this rule has been validated.

I can understand why. It is extremely difficult in a regulatory climate which dictates that “past performance is not a guide to the future”, to use past performance as a reason to invest in private assets. Betting on the enterprise value of stocks is fine for seed capital, but the big money needed to reflate the UK economy is in the Series of capital issuance some way down the line. The growth in valuations of stocks is based on existing revenue generation as well as future prospects.

The frustration for Government is that words like “enterprise” and “entrepreneur” do not transfer easily into discussions on the investment of other people’s money for their retirement. There is still the ghost of Robert Maxwell , haunting pension investment, the fear that the cunning entrepreneur could be using pensions to fund lavish lifestyles.

These deep-seated prejudices are legitimate, but they need to be set against improvements in the governance and of the quality of investment analysis of those companies who present opportunities to investors.

Again, there is little of the information about how such investments have performed to make a public case for investing in them cogent.

The “why not?” is a question that still begs an answer.

The Local Government Pension Scheme

The biggest manager of private assets in pensions is LGPS. Next week, it holds its annual conference in Gloucestershire, organised by the PLSA.

I will be there talking with investors in private markets about the risks they take on behalf of those who fund the pensions paid to members. I want to know about their decision making and what makes it easier for them.

I would like to know what their investment story is and whether it can be generally recounted (as Debbie Fielder did at a recent Hymans Robertson event).

Creating a compelling case

There are only so many calls to be made by Government on the pensions industry before it decides to mandate change. So far, other than in the LGPS, pick up in investment in private markets by DC savers has been slow – too slow for the Treasury

With most Defined Benefit Schemes still intent on buy-out, the Government sees the opportunity with the dark blue line – private sector defined contribution (which includes the hybrid element of DB schemes.

I hope that when I return from the Cotswolds Water Park (yes that’s where the LGPS conference is), I will know more and have more of a story to tell.

I hope too that we will start seeing the asset management industry getting its act together and talking the book for private markets as a means to raise returns for DC savers.

The alternative is a return to the conversation that has happened in private sector DC where sponsors (employers and savers) are required to put more and more money into “safe assets” which don’t work as hard as they should.

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 Will private markets raise returns on our pension savings? The case is ,as yet, unproven

  1. DaveC says:

    This sounds a great deal like using pension savings for venture capital?


    I think we’d need a bit more discrimination on investment criteria before putting our money anywhere near those sorts of enterprises.

    Now, how to pick the winners from the losers?

  2. Richard Chilton says:

    I can give some figures that show the concerns that many people with pensions will have about such investments. 9 years ago I invested in a “patient capital” investment trust that seemed to invest in the same sort of things that are now being envisaged. The value of that investment has gradually dwindled over the years to the point that it is now worth just 11% of what I paid for it. Meanwhile my investments in funds using traded equities have grown in value, some doubling over this period of time.

    I am not sure who benefited from my “patient capital” investment, but it wasn’t me. It was probably those involved in unsuccessful business ventures, plus the parts of the Financial Services industry managing those investments.

    I think those with pension pots will want to know if similar new investments are likely to do them any good, or if they are just a tax for the benefit of others.

    • byronmckeeby says:

      That sounds like the Woodford Patient Capital investment trust now re-branded as a Schroders fund under its new management?

  3. Con Keating says:

    There is a broader issue of valuation. Clearly the market does not believe managers’ NAV estimates (34% discount on PE ITs) – and can we really believe the absence of any meaningful decline in DB scheme private asset valuations over 2022?

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