It is remarkable how much of the UK’s financial angst comes back to pensions. Any conversation in the City about the waning influence of the London Stock Exchange invariably ends up with someone bemoaning the fact that defined benefit pensions schemes invest less than 3 per cent of their assets in UK equities compared with nearly half in 2000.
Then there is broader “productive finance” angst, or the idea that long-term capital across pensions and insurance isn’t going into “growthy” investments that the economy really needs. Less than 1 per cent of the near-£5tn in pension and insurance assets is invested in unlisted UK equity, defined as venture or growth capital or private equity, says think-tank New Financial.
The government has spent recent years banging on about getting more money into infrastructure or other illiquid investments. This is an old theme given a new lease on life thanks to the on-off obsession with “levelling up”.
It isn’t that easy, of course. Private sector defined benefit schemes, if anything, are going in the opposite direction: they are largely closed, increasingly mature and trying to reduce risk by matching payouts on members’ benefits to fixed-income assets. Regulation is pushing such schemes towards less risk and insurance sector buyouts.
The younger membership in defined contribution schemes, where savers bear the risk for their eventual pension pot, offers the timescale for riskier investments. But the market is fragmented and pots are generally too small. Pushing higher-cost investments, like last week’s move to exempt performance fees from the cap that protects savers, risks eating away at already-insufficient provision.
Another slice of pension money, on the face of it, looks more promising. The Local Government Pension Scheme is a defined benefit scheme with a pot of money to invest (unlike the civil service or teachers’ schemes) and still open (unlike most private sector peers). Although legally one scheme, notes pension expert John Ralfe, it consists of about 100 regional funds which together hold £400-500bn in assets. This looks the closest potential equivalent to Canada’s much-admired pension fund, CPPIB, which manages more than C$500bn.
Three-quarters of those LGPS funds are invested in equities and other risk assets. The trouble is, Ralfe told the Pension Investment Corporation podcast, much of it is overseas: 40 per cent of the money going into risk assets is in overseas equities, more than double the allocation to the UK stock market.
Last year’s levelling up white paper suggested that 5 per cent of local government pension scheme assets should go towards local projects, something some in the sector say was a red herring and a benchmark that many funds already hit. Pension trustees of all stripes rightly bristle at the suggestion of investment mandated by public policy goals lest the needs of UK plc aren’t best for their membership. But a corner of the pensions world with generous benefits and de facto taxpayer backing is at least a sensible place to be having that conversation.
A long-awaited consultation on the sector is promised as part of the Edinburgh reforms of financial services. Previous consolidation, under the coalition government, resulted in a halfway house with investment pooled into eight regional funds but with liabilities and asset allocation managed locally.
That model has had some success: for example GLIL Infrastructure, a grouping of various local government pension funds, last month bought a 25 per cent stake in the M6 toll from Australia’s IFM. But there are constant rumblings that further consolidation, even if it required explicit government guarantees, could save costs and help invest more widely.
There are various problems here. One is the obvious political wrangling involved in centralising decisions or liabilities that are currently held locally and overseen by local representatives. Governance would be crucial, with fears that schemes could be pushed towards pet political projects. And consensus is that — while larger investment pools with more resources might help — investment in infrastructure is hampered by a lack of suitable projects. Unblocking that pipeline requires more impetus locally as well as planning reform.
Even if the government finds its pot of levelling up gold in the pensions sector, it will have solved only half the issue.
