Crypto: Will consumer popularity make it attractive for pension funds?

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One of the largest funds in Australia, the Retail Employees Superannuation Trust, could become the first Australian retirement fund to invest in digital assets, and the US already has more than one pension fund investing in cryptocurrency more broadly. Will UK pension funds be following in their footsteps?

Rise of cryptocurrencies

Bitcoin has grown rapidly since its invention in 2008, but has been avoided by institutional investors due to its newness, volatility and little to no regulation.

The profile of cryptocurrencies has risen according to research conducted by the Financial Conduct Authority earlier this year. Over three-quarters of adults said they have heard of cryptocurrency, up by 5% the previous year.

The FCA estimates the number of consumers holding cryptocurrency has risen to 2.3m, with the median holding rising from £260 to £300.
"Bitcoin has been around more than 10 years now, but it is a relatively new space. It's growing, the market cap of crypto is just under $3tn now ($2.8tn), which sounds like a sizable amount but when you compare it to Apple... it's still dwarfed by the traditional market space. But it’s growing and will continue to grow," said chief marketing officer at digital asset exchange Archax, Simon Barnby.

Crypto concerns

There are legal issues for pension trustees when it comes to investing in crypto. Little or no regulation of cryptocurrencies means that trustees could only allocate a relatively modest amount of their overall portfolio to direct investments into cryptocurrencies.

"You can make lots of money in volatile markets, but it is a volatile investment so you can’t do the same kind of research that you can investing in companies. It’s a very different concept that investors have to get their head around," said Barnby.

Even once an understanding of cryptocurrencies has been gained by trustees, the key thing to consider is whether they would be acting in the best financial interest of their members.

A spokesperson for the Pensions Regulator said: “While pension schemes are permitted to invest in a wide range of instruments, they should always be appropriate to the long-term nature of pension obligations. We would not expect trustees to speculate with savers’ retirement savings.”

Crypto “really does not feel like the kind of appropriately risk-adjusted and stable longer-term returns that would be suitable in the context of most pension schemes,” said Daniel Barlow, a director at trustee firm LawDeb. “I don’t think this is an asset class into which I would be comfortable investing my own money, let alone my scheme members’.”

The FCA has received a high number of reports of scams involving cryptoassets, making them very high risk.

But with legal risks also present in more traditional forms of currencies – highlighted by NatWest’s £264.8m money laundering fine announced last week – Barnby argues cryptocurrencies’ audit trail has a “much clearer” history than banknotes, for example.

"I think there are all sorts of benefits, and we would try to allay some of those misconceptions and some of those fears because they are being addressed,” he said.

A strategic position?

Around half of crypto users plan to buy more, and a similar proportion say they “know they’ll make money at some point”, according to the FCA.

Barnby believes with the end client in a pension fund being one of these 2.3m crypto users, pension funds will see a demand in savers wanting to see crypto in their pensions too: “As crypto grows and grows, it's one of those things where if you’re running a balanced portfolio, you should probably have some exposure to it... I think it's inevitable that there will be pressure from various sides for firms to have some kind of allocation to it."

Although there have been examples of cryptocurrency used in some multi-asset mandates, director at LawDeb Natalie Winterfrost said that this would not be a strategic position. “I wouldn’t necessarily avoid a multi-asset mandate that chose to do so, any more than I would a multi-asset mandate that chose to take active positions in traditional currencies. But... I would not want to see a significant part of any managers’ risk budget spent on cryptocurrency speculation,” she said.

How will crypto impact on pension funds?

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