Boris Johnson and Rishi Sunak’s call for British pension funds to invest “hundreds of billions of pounds” into UK assets and aid the country’s economic recovery has been met with caution by analysts.
In a letter to the investment industry, published on Wednesday, the duo stated that pension funds are “under-represented” in owning UK assets. It also highlighted that “over 80% of UK defined contribution pension funds’ investments are in mostly listed securities, which represent only 20% of the UK’s assets”.
Hargreaves Lansdown senior investment and markets analyst Susanna Streeter (pictured) said the government is intent on altering the fact that currently overseas pensions funds are more likely to benefit from long-term UK investments compared to their British counterparts.
In July, AustralianSuper, the largest Australian pension fund announced it would spend $3.7bn to boost staff in London and explore deals in infrastructure and private debt.
Big bang requires kindling before a spark takes hold
But Streeter pointed to a number of hurdles to jump before the idea becomes reality.
“The big bang of investment would provide a slow burn of capital heat to propel Britain’s recovery from Covid-19 and its long-term growth,” said Streeter. “But many institutional investors and pension funds, would argue the kindling needs to be laid first before the spark can take hold.
“This would include the removal of the cap on fees that defined contribution schemes, which does appear to be in hand, with the Department for Work and Pensions set on reforming this.”
Streeter said the launch of the UK infrastructure bank could also encourage joint investment in long-term green schemes.
“The biggest change is likely to come with the revving up of a new vehicle for investment management – the long-term asset fund – which will open up possibilities of investment, which until now have been restricted for UK pension funds.”
Maximising returns more important than prime minister’s request
AJ Bell head of retirement policy Tom Selby said that both prime minister Johnson and chancellor Sunak are banking on retirement investors to deliver the investment big bang and power the UK economy back to health.
“Given their long-term focus and scale, defined benefit and automatic enrolment, pension schemes might seem ideal candidates to support UK companies,” he said. “However, just because the prime minister and chancellor click their fingers, pension investors will not necessarily flock to illiquid UK investments.
“The reality is that pension scheme trustees have a duty to invest members’ hard-earned retirement pots sensibly, considering various factors including risk appetite, cost and, increasingly, impact on the environment.”
He added that while the focus is on institutional money, retail investors should think very carefully before pilling into illiquid UK assets.
“Such assets may offer growth opportunities but can come with extra risks. This was most famously demonstrated in the collapse of Woodford Investment Management, which backed illiquid start-up companies and ended up unable to sell them quick enough to get cash to investors.
“Ultimately, the main job of pension schemes is to invest in a way that maximises returns for their members, not in the way the prime minister tells them to.”
The creation of long-term asset funds
AJ Bell head of investment analysis Laith Khalaf said that while illiquid assets can be volatile, the government is pursuing long-term asset funds.
“Illiquid assets have caused problems when married with open ended fund structures in the property sector, and in the collapse of the Woodford funds,” he said.
“Nonetheless the chancellor is pursuing the creation of long-term asset funds, which will be open-ended and yet invest in illiquid assets like infrastructure, private equity and real estate.”
In doing so, Khalaf says the government is harnessing the vast wealth in pension funds to fund a large part of its green agenda, while also boosting the economic recovery by funnelling investment into small UK companies.
Khalaf said this comes with compromise as long-term asset funds will have 90 to 180 days of notice periods or even longer, so managers can deal with investor withdrawals appropriately.
“Institutional pension funds don’t like to put money in investment trusts because of their ability to trade at a discount or premium, and their volatility. But many private investors are well practiced in buying investment trusts in their portfolios, and these vehicles already do a good job in providing exposure to illiquid assets.”
“Investors are probably more concerned with creating a diversified portfolio of good investment opportunities rather than using their money to do a bit of flag waving” he added.
