I feel like the Government’s agenda around pension scheme investment is a bit confusing at the moment.
On the one hand, there is the drive for DC schemes to invest more in illiquids, infrastructure and private markets generally. Then there is the added element that the Government believes a growing proportion of this needs to be in the UK, to help the UK economy.
The drive for more pension scheme investment generally in alternatives is grounded in other agendas:
- Scheme consolidation and improving the capacity for sophisticated investment
- Schemes needing to prove Value for Money through showing that they are seeking returns in the best possible way, while also managing risks, volatility and charges
- Sustainability and the use of investment in infrastructure and green business to work towards Net Zero
But to add to this we have calls from the Government for both DB and DC schemes to invest more in UK private markets and infrastructure.
I worry about how these two distinct motivations will work together. Let’s break this down…
Clearly Government and probably all pension stakeholders would like to see a world in which schemes have the capability and resources to invest in the best assets for their members, whether they be fixed-income, listed equities or private equity and infrastructure. The drive towards consolidation, no matter how one feels about the current roadmap for getting there, should result in increased scheme capability. But how does the driver for better investment, reflecting member needs, work with a push towards more domestic investment in private equities?
What if, for example, UK private equities aren’t actually a good investment? Industry responses to Government indicate that pension scheme investment is low in UK private equity and infrastructure because these assets are not delivering the best returns, regulation gets in the way, and creating a push towards these assets could distort the market, further reducing the quality available and increasing costs.
What about sustainability and net zero? Assessing assets for ESG and climate change credentials has become an essential element of pension investment portfolio design. Researchers say that investment in sustainable UK assets is low, but that this is partly a supply problem. So, while it makes sense that UK pension scheme investment in sustainable UK assets might help achieve our net zero goals, should a UK asset be chosen over an international one that performs better? Is it not the role of the Government and the market to ensure that these quality UK assets exist to attract investors?
Here is the crux of the issue, when dealing with two motivators – the desire to do the best for members and pressure from the Government to invest domestically, how are schemes supposed to choose when these two conflict?
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