The Pensions and Lifetime Savings Association has suggested 12 “new solutions and policy levers to attract greater pension fund investment in assets that have the potential to drive growth in the UK economy”, in response to calls for pension funds to do more to help kickstart the economy, including upping trustee skills and bringing consultants into the remit of the Financial Conduct Authority. 

  

The proposals range from ensuring that there is a suitable pipeline of investment opportunities, packaged by asset managers and government entities so they are appropriate for pension funds, to targeted regulatory and fiscal interventions, including some related to the operation of the auto-enrolment market. They were published in a new paper on Tuesday, as the PLSA’s Investment Conference gets underway in Edinburgh.  

 

   
Director of policy and advocacy Nigel Peaple said: “How pension funds can play a bigger role in providing capital to support growth in the UK economy is an important question, and in our discussions with schemes, there is a clear appetite to invest in the UK – where it is in the interests of savers.” 

 

Pension fund trustees look after money which either directly belongs to savers or is held on behalf of savers to back pension rights they are legally entitled to. Trustees therefore have a fiduciary duty to invest in scheme members’ best interests. 

 

However, successive governments have sought to get pension assets to also serve the UK. The PLSA has been working with the government on ideas to get pension funds investing in the UK. The issue has come to greater prominence again as the UK economy is stagnating following Covid-19 and amid high energy prices, trade barriers and labour shortages. Recent high-profile listings in other jurisdictions have also led to calls for more pension fund investment in equities, to make the UK more attractive for companies. 

  

“Over recent months, there have been many public calls, from government, stakeholders and the media, for pension funds to play a bigger role in providing additional capital to support growth in the UK economy, especially through increased direct investment in infrastructure, private markets and venture capital,” the PLSA noted.   

  

In March, chancellor Jeremy Hunt announced a Long-term Investment for Technology and Science initiative to incentivise defined contribution pension scheme investment into the UK’s science and technology sector, while a new type of open-ended vehicle for illiquid assets, the Long-Term Asset Funds, has been made available to DC schemes. Others want to see still more pension money in UK firms, with the lord mayor of London calling for DC investment in a Future Growth Fund to raise £50bn, controversially saying that this could be forced. 

 

    

Others have focussed on consolidation to promote similar aims. The Tony Blair Institute has proposed merging pension funds to create superfunds.  

 

“Many commentators have suggested that the best way of achieving additional investment in UK growth assets is by undertaking radical and rapid consolidation of the pensions sector. We do not disagree that scale can have many advantages but, in our assessment, there are many quicker and simpler ways of achieving these objectives,” the PLSA commented.  

  

The association said it thinks the barriers to pension fund investment have not been fully understood – such as the fact most private defined benefit schemes are closed to new members and future accrual, or that there is a general trend towards international allocations. Despite this trend, the proportion of UK pension fund assets in the UK domestic market is above average when compared to a group of seven rich OECD countries with a substantial pensions market, with 32% of assets invested in the UK, it stressed. 

  

The PLSA’s ideas are: 

Suitable UK investment opportunities: the asset management industry should be encouraged to focus on sourcing UK opportunities and developing new investment funds and products, such as LTAFs, which are appropriate to pension fund needs, and the British Business Bank should be given an extended scope to support companies that need scale up capital, and to create or partner with funds that can bundle up the assets in a form that would be suitable for pension funds 

Fiscal incentives: enhancing the tax treatment of domestic investments, as in France and Australia, merits exploration.  

Policy certainty: a clear plan for the UK economy, including the green transition, to allow the UK to compete with non-domestic assets.  

  

Auto-enrolment market – employers and corporate IFAs: the market should be incentivised to ensure that those purchasing workplace pensions balance net performance and costs, focussing on ultimate member outcomes. Government should consider whether the FCA rules on suitability of DC default funds and the regime applying to corporate IFAs are fit for purpose.   

Auto-enrolment market – trustees and investment consultants: More should be done to ensure trustees have the skills necessary to make investment decisions and that they receive good advice from investment consultants. Consideration should be given as to how to enhance the skills of trustees and to bring investment consultants within the regulatory perimeter of the FCA.  

Scale in DC products: use fund of funds to produce a more balanced investment, rather than further speeding up consolidation of DC 

Auto-enrolment contribution levels: the government should increase contributions by removing the lower earnings limit and by starting automatic enrolment at age 18 instead of 22. The government should also consider further increases in contribution levels from 8% to 12% over the next decade.  

The LGPS regime: The Scheme Advisory Board’s good governance review should be implemented as soon as possible. The government should work with funds and pools to understand the comparable international governance models to establish best practice.  

Asset pools: the primary focus should be on ensuring the current structures work well via the provision of guidance or regulation to support collaboration between and across funds and pools.  

Resources: provide more resources to ensure the effective operation of the LGPS, including within its supervisory bodies. 

The Pensions Regulator’s DB funding code: Where supported by a strong employer covenant, open DB pension schemes should be able to carry long-term risks as part of their investment strategy, even as they approach maturity.  

Solvency II: reforms are needed to the solvency regime for insurers such that it would incentivise them to directly take over more illiquid assets held by pension funds as they approach buyout. The operation of the current market encourages schemes to simplify their asset holdings, providing gilts and cash to the insurer, often incurring a ‘loss’ on their value.