The lord mayor of London has called on defined contribution pension schemes to invest 5% each in a new Future Growth Fund and was reported earlier this year as saying this should be mandatory. The Corporation has now said mandating is just one end of the spectrum, but the cat has been set among the pigeons.

 

In March, lord mayor of London Nicholas Lyons – the chair of provider Phoenix who is on sabbatical for a year – said DC schemes should invest in high growth firms via a new Future Growth Fund. 

 

In a report by EY for the City of London, ‘Powerful Pensions’, he said: “I and the City of London Corporation call on industry and our pension funds to collaborate and plug the funding gap faced by our high-growth firms.” 

 

Doing so would support jobs and prosperity across the entire UK economy, he wrote, adding: “Such a fund, that over time allocates 5% of all pension contributions into it, would give millions of people a modest but meaningful stake, democratising returns, and give everyone a role in creating the UK’s most innovative companies of the future.” 

 

The report proposed a headline figure of £50bn, "equating to 5% of UK DC pension fund assets”.  

 

While the report itself does not say so explicitly, the Financial Times reported Lyons in March as saying that he wants mandatorily to have 5% of every single DC pension put into that fund. 

 

The City of London Corporation appears to now be rowing back on the lord mayor’s comments in the FT. A spokesperson said: “We’re working with industry asset managers and pension providers on a voluntary expression of interest.” 

 

This will help catalyse action and build on the initiatives already aimed at increasing investment from institutional investors, particularly defined contribution pension schemes, into unlisted equities, the Corporation says.

 

“Ultimately it’s up to businesses to join the Future Growth Fund or use new or existing investment vehicles to increase investment in these asset classes,” the spokesperson adds. 

 

Mandatory investment was part of the discussion around the solutions that are available to get more investment in UK unlisted businesses, according to the City.

“Mandating is one end of the spectrum which the lord mayor was mentioning, at the other end is a voluntary agreement,” the spokesperson says, adding that Lyons “would prefer a voluntary agreement and commitment of some kind” to increase investment in these UK asset classes. 

 

 

The comments come after pension professionals reacted to the idea of mandating pension investments in newspapers and on social media. Commentators have cited the need to invest in members’ interests. The notion that DC schemes should be forced to invest in a particular way has caused incredulity and even outrage.  

 

Professional trustee at Pi Pension Trustees, Paul Black, says anything which starts directing rather than just encouraging trustees to invest in a certain way is “challenging” because of the ever-present possibility that the investment turns out not to be good for the scheme’s members.  

 

“Clearly if the trustees are directed to invest in this and it turns out not to perform very well, then it can't be the trustees at fault,” says Black. “So whose fault is it? Then it goes back to the government, [and] then it is difficult to work out how members might be compensated at all for that.” 

 

Black says for an investment to be good for the members, it must be attractive.  

 

“It's up to the politicians to make investments attractive to pension schemes, not to tell pension schemes that they have to invest in something regardless of how attractive it is or otherwise,” he adds, saying politicians had better spend their energy on setting that framework clearly. 

  

Black is also not convinced by proposals from the Tony Blair Institute to merge pension funds into megafunds to facilitate investment. He thinks the key is that funds are well governed – which they can be if they are small, he argues, pointing out that the assets of smaller schemes are pooled at asset manager level, thereby gaining access to the same opportunities. 

   

“The whole thrust of a lot of government policy last year has been towards larger schemes, and that in itself is fine with assets, but it's not the only solution. It's not large is good and small is bad. There are some schemes which are very well run regardless of how large they are,” he says, believing the current ‘bigger is better’ mantra to be overly simplifying. 

 

 

If trustees remain unconvinced, other pension commentators are even less impressed with the idea of directing pension funds to invest in a particular way. 

 

A government that forces pension funds to hold a certain type of assets “has crossed a very dangerous line. We've never had this in the UK,” says independent consultant John Ralfe.  

 

"Government is about persuading people. It isn't about waking up on a Monday morning, going in and saying, ‘Right, you will do this’ - unless you live in a dictatorship,” he says. “The whole thing is pretty extraordinary.” 

  

Ralfe also thinks it would be difficult to override fiduciary duties built into centuries of trust law at a stroke. 

 

“Every so often, there is another legal case which looks at the finer points of what constitutes fiduciary duties under trust law. And it might not be pensions, it might be much broader than that because trust law predates pensions,” he observes. 

 

If it was voluntary, Ralfe is not opposed to having a growth fund like the one proposed by the Corporation.  

  

However, this means that “they have to explain why it's a good fund, and they have to be competitive on price, and they have to be transparent on what they're doing,” he says.  

 

Pension lobbyists are working with politicians to discuss ideas about how pension investments and the UK economy fit together, in a way that keeps the scheme members in the picture.

Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, notes there are a range of initiatives with which both the government and the opposition are looking to generate growth in the economy, including the Long-term Investment for Technology and Science initiative, more general unlisted equity or other alternative investment classes.  

 

“We are engaged in this thinking, alongside others in the financial services sector, to see how it would be possible to achieve an alignment of interests between savers, pension schemes, and policy objectives. We believe that, with the right regulatory or fiscal changes, it should be possible to make investment in less liquid assets of benefit to pension funds,” Peaple says. 

 

“Investing a suitable proportion of assets in a sovereign wealth fund, or in equivalent private sector schemes, might well be appropriate for some schemes. But in all cases, they will have to meet the needs of pension scheme members in line with our fiduciary duty,” he adds. 

 

   

 

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