‘This is not a gamble that should be taken’ – Johnson & Sunak push for ‘riskier’ pensions

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Boris Johnson and Rishi Sunak have called on the UK’s institutional investors to “seize the moment” and invest more capital in long-term UK assets. In an open letter to the industry, investors were urged to invest in UK assets “from pioneering firms to infrastructure”, which would enable pension savers to access better returns and support an innovative, greener future.

The Prime Minister and Chancellor declared “now is the time” to unlock the hundreds of billions of pounds sitting in UK institutional investors and help drive the UK’s recovery from the pandemic.

The letter, co-signed by the Prime Minister and Chancellor, said: “It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country….

“…We want to see UK pension savers benefitting from the fruits of UK ingenuity and enterprise, being given the opportunity to back British success stories, and secure higher returns and better retirements.”

Currently, global investors, including pension funds from Canada and Australia, are “benefitting from the opportunities that UK long term investments afford”, while UK institutional investors are under-represented in owning UK assets.

Both the Prime Minister and Chancellor stressed they recognised that choosing which assets to invest in remains a matter for pension fund trustees and other institutional investors, but they urged them to consider whether they could invest more UK assets that require longer-duration investments.

On this, Rémy Astié, the founder and CEO at Vauban, reflected on whether Mr Johnson or Mr Sunak have any right or precedent to tell pension funds how to invest.

“They certainly have the – indirect – power to do so,” he said.

“Pension funds are heavily regulated and, rather than having a list of forbidden asset classes, they do have a list of authorised asset classes that they can invest in.

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“Broadly speaking, these are listed fixed-income instruments and blue-chip equities. Illiquid assets like private companies have typically been excluded on the basis that they’re riskier.

“There has been a big push from the conservative Government to widen the list to illiquid asset classes like venture capital. This is because investing in private companies typically yields more benefits for the country in terms of job and wealth creation as well as technological advancements. This coincides with an era where fixed-income instruments, the bread and butter of pension funds, do not yield anything anymore, and most pensions are barely covering inflation after fees. Therefore, in the hunt for yield, moving into riskier asset classes is becoming a realistic option for pension funds.”

Changes appear to already be in the works following the open letter, as the Financial Times confirmed the pensions regulator abandoned plans to limit investment freedoms for retirement schemes.

In March, the regulator proposed to cap investment in unquoted assets to no more than a fifth of a portfolio, but these plans have now been scrapped.

Moving pension funds into unlisted and risky investments could prove to be detrimental to retirees and the Government has been condemned by many for this.

George Uglow, a financial planner at Irwin Mitchell, commented: “While there could be a place for higher risk investments within an investment strategy to target long-term growth, there needs to be a balance between this and the immediate income needs of those already reliant on their pension.

“Encouraging pension funds to invest in high-risk assets could be deemed as irresponsible.

“Each scheme member will have their own risk profile and individual objectives, so encouraging pension funds to invest into higher risk, unlisted assets could be unsuitable for many savers, depending on their age and stage of life.

“When considering investment into unlisted assets, of course there could be a place for them within the make-up of a diversified investment portfolio, but you also need to be aware of the risks which are primarily loss of capital and illiquidity. The level of pension benefit provided by a Defined Contribution scheme is dependent on the pension fund value. A significant drop in value, which is not uncommon with more volatile assets, could massively affect an individual’s retirement plans.

Defined Benefit pensions provide a guaranteed level of income in retirement so the pension fund needs to ensure they continue to hold income generating assets in order to supplement this income requirement. Unlisted start-up companies tend to not pay dividends in the early years as profits are reinvested to drive the growth of the business. Given the volatile nature of the asset, holdings are also more difficult to sell. While there could be greater potential for growth, immediate income needs should be considered as well as diversification across all asset types.

“It is also important to consider scheme failure or insolvency; if a pension fund isn’t appropriately funded for its members, a government bailout could be required which creates further pressure on the state.”

Similar sentiment was shared by Romi Savova, the CEO of PensionBee.

Ms Savova said: “It’s alarming to see the Government encouraging the use of pension savers’ hard earned money as a piggy bank for pet political projects.

“Alternative asset classes should be treated and evaluated like any other investment opportunity, and the Government’s proposal to invest in high risk early stage growth businesses, comes with very large fees and no guarantees of good returns.

“This is not a gamble that should be taken with consumers’ life savings.”

However, on the flipside of this, some experts welcomed the news as a positive step in the right direction.

James Wise, a Partner at Balderton Capital, commented: “Britain has one of the fastest-growing innovative economies in the world today. These reforms will make sure dynamic British businesses continue to have access to the patient capital they require to grow while ensuring that more British savers, pensioners and taxpayers benefit from the success of these incredible companies.

“As a backer of over 10 British unicorns, we were happy to contribute our research to these policy changes and are sure these reforms will mean even more people can be part of the UK’s exceptional digital growth story.”

Pete Glancy, the Head of Policy at Scottish Widows, also said: “The Government is right to look to the power of pensions to help Britain recover following the pandemic. Trillions of pounds are invested in UK pensions, which could make the difference as the country sets its sights on a return to prosperity. UK savers will benefit too, as the returns on these long term investments hold the potential to give a much-needed boost to retirement pots.

“We’ve long campaigned for the UK’s pension savings to be unleashed on the country’s infrastructure and economic initiatives, and it’s promising to see the Government acknowledging the obstacles still preventing long-term illiquid investments. We hope this talk turns to action and the Government’s call for an investment big bang does not end in a whimper.”

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