Big picture stuff

The Treasury is softening up the British Public for change

This weekend, the softening up of the British public to the idea that pension schemes can invest for Britain gathered further momentum. The Times ran an article headlined

Can pensions be unleashed to rebuild Britain?

The Telegraph carries the same message

🔵 Chancellor expected to outline the plans during his Mansion House speech https://t.co/tecAsEpNTp

— The Telegraph (@Telegraph) June 23, 2023

The FT runs with

Call for UK to use co-investment with pension funds to drive backing for riskier assets

The Calls are from the Association of British Insurers which today is indeed “calling” for more help/incentives from the Government to allow insurer to invest in private illiquid markets.

Everywhere, Treasury spokespeople seem to be offering comment , trailing the likely announcements by Jeremy Hunt at this week’s Mansion House speech that pension schemes will be encouraged to invest more heavily in assets that matter to the UK economy.

This kind of coordinated campaign only happens when the Government is serious. While we will see no “law-making” this week, we can expect a clear indication of the political direction of travel and it is towards

1. Further consolidation of pension pooling vehicles – whether in LGPS, Corporate DB or DC workplace pensions
2. Pressure to encourage a shift from price to value in the procurement of investment services
3. An encouragement for  long term investment in patient capital.

Relative to other developed countries such as Australia, Canada and the Netherlands, , Britain is under-investing its £4.2 trillion of funded pensions in its local economy making it hard for fast growing companies to find finance at home. Many UK companies seek funding overseas, especially from the USA while many of the large capital-intensive projects in the UK are being funded by overseas pension schemes.

In view of the heavy investment from the UK tax-payer in tax-breaks for UK pension funds, the Treasury clearly does not think that the country is getting value for its money.

Taxation will be key

While the Treasury has made it clear that the current Government is not looking to legislate to make investment in the UK growth sector compulsory for pension schemes and funds, it has not ruled out reorganizing the incentives that influence the deployment of capital. The Treasury’s usual means of reorganization is to change the rules surrounding the taxation of pensions. We have had one minor tweak in pension taxation this year and many expect a further one to be indicated in this year’s Autumn Statement – perhaps to be followed through in the Spring Budget.

Headwinds from the non-insured pension sector

Opposition to Treasury pressure focusses on what is known as the “fiduciary duty”, the requirement on those who look after other people’s money to ensure that that money is managed in the interests of members rather than other stakeholders – including the Treasury.

Fears are that centralised pooling vehicles , as is happening in the Local Government Pension Scheme will disempower local pension funds from taking decisions appropriate to member needs and leave the LGPS regional funds open to political interference.

Similar fears are expressed from the corporate sector , where many companies still sponsor their own pension schemes arguing that pension funds are better run by and for the companies who sponsor them by relatively anonymous master trusts and insurers.

Again there are fears that Government interference will lead to the wrong kind of risks being taken by the wrong people. This is particularly strong with DC pensions where the risks are taken by ordinary people who have little financial resilience

A difficult task for Government

Balancing the natural conservatism of the pension industry with a need for change in pension fund investment is no easy task.

The Department of Work and Pensions has set about reforming the way in which procurement of DC pension services through its proposed Value for Money Framework.

It has clearly signaled to its regulator, the Pensions Regulator, to change tack on DB pension funding to encourage rather than discourage their investment in “growth assets”.

The Treasury’s regulator the Financial Conduct Authority, has established a new funding vehicle – the Long Term Asset Fund – which it hopes will be adopted by pension investors that cannot invest directly into patient capital, so they can do so using insurance platforms.

But it looks unlikely that these reforms will be enough to move the scale of assets into productive capital, required by Treasury models.

Insurers to the rescue?

This strategic shift in policy is coming at the right time for the insurance industry which is looking to re-establish the rules it operates under with regards insurance solvency.

While the non-insured pension sector worries about fiduciary duty, the insurers see an opportunity to take further control of parts of pension funding they have little control over.

The likely transfer of risk from corporate DB pensions to insurers and others “buying-out” guaranteed pensions, will see large flows of capital into insurance companies own funds. These funds area potential source of productive finance for the nation.

The Association of British Insurers are aware of the opportunity and will today be releasing a report on what it feels the Government should be dong to encourage insurers to come to the rescue.

This blog is published too early for details, but expect the tone to be as reported in the FT

….state backing for riskier, illiquid investments would help make the UK a “more attractive” destination for its members.

“By developing further initiatives that use co-investment as an incentive, the government could create opportunities for pension funds to put more money behind assets that align with its wider policy objectives,”

it said.

“For any investments that are expensive and/or riskier, such incentives would shift the balance of risk and reward, improving the value for savers, and making them more attractive to schemes.”