Pensions Regulator’s new guidance, encouraging pension funds to invest 5% in unlisted assets, adds significant risk, and ignores the value in listed UK equities which are only 4% of many pension portfolios, says Ros Altmann

Unlocking pension capital to support UK growth and businesses is right, but the Mansion House reforms don’t require any of the £70billion taxpayer pension reliefs to be invested in the UK

To really boost Britain, pension funds should buy more listed companies, including ready-made UK-listed investment trusts portfolios of small growth firms, alternative energy and infrastructure

Pension funds have cut UK equity investments dramatically, weakening our economy and financial markets, leaving great British firms vulnerable to foreign predators, which damages us all

Unlisted companies are highest risk assets: The Pensions Regulator has today released new guidance https://www.thepensionsregulator.gov.uk/en/document-library/scheme-management-detailed-guidance/funding-and-investment-detailed-guidance/private-markets-investment, aiming to encourage pension fund trustees to increase allocations to private markets. These are generally considered highest-risk assets. Those that succeed do offer huge returns over time, but many start-ups or early-stage ventures fail, losing all their investors’money. Obviously, a diversified portfolio is needed, to offset the risk of too many failed investments, which is meant to be captured in new ‘Long Term Asset Funds’. But I do find it concerning that there is a focus on unlisted companies, rather than ensuring greater allocation into listed equity markets, especially smaller stocks, which have languished in recent times.

Pension funds have cut listed UK equity market exposure to around 4%, so recommending 5% in unlisted companies seems out of line: In the last 15 or 20 years, UK pension funds have dramatically reduced their exposure to equity markets in general and to UK markets in particular. From around 40%, they often now hold 4% or less in domestic company shares. These are the lower-risk end of the equity spectrum. If they comprise so little, the 5% target for unlisted equities seems relatively high. The new guidance states that ‘private market assets can play a valuable part in a diversified portfolio that aims to improve and protect saver benefits’ but this needs to be balanced by smaller listed company investments too. Pension investors should be encouraged to consider increasing listed equities, not just unlisted. UK financial markets are languishing at lowly ratings relative to the rest of the world and the corporate sector and IPOs have struggled to raise capital.

Today’s Pension Regulator guidance, built on the Mansion House reforms, don’t require any minimum investment into UK businesses – a real missed opportunity: The Regulator’s guidance encourages pension funds to consider adding unlisted equities to their portfolios, as a way of improving long-term returns and UK growth, but there is no requirement for any of the money to go into UK investments. Of course, adding unlisted investments significantly increases risk and maybe it is considered that diversifying into foreign markets can help risk reduction, but the stated aim is to ‘unlock pension capital to support UK growth and businesses’, so surely that requires investing here, rather than abroad. The aim of boosting UK growth is diluted unless it is focussed on UK growth companies.

Taxpayers spend £70billion a year on pension tax and National Insurance reliefs, which could be backing Britain: Naturally, pension fund investment managers and trustees prefer the freedom to invest anywhere in the world but, with massive fiscal deficits, it seems to me the £70billion a year in taxpayer-funded pension reliefs should be put to better use. If more money was directed into growth stocks and infrastructure, fiscal pressures would be lower and long-term returns for all UK assets could be higher, enabling British pensioners to retire into a more prosperous economy.

Investment trusts and listed closed-end funds offer ready-made specialist portfolios for pension funds to diversify asset allocation into sustainable growth and infrastructure: Pension funds should consider including ready-made UK-listed investment trusts and REITs as an ideal means of diversifying their asset allocation into areas of the economy which the Government particularly wishes to support. The UK’s long-standing investment trust sector offers ready-made portfolios of small growth firms, alternative energy and infrastructure assets, in a closed-ended form, which is far better suited to long-term illiquid investments than buying individual companies or open-ended funds. This would be an ideal way to boost long-term investment returns and sustainable growth.

60% of UK-listed investment companies invest in real assets and make up over 30% of the FTSE250 but misleading charge disclosure rules have driven investors away: The UK economy and financial markets have suffered recently due to a crisis in the investment trust sector, worsened by a spectacular regulatory own-goal. Investment trusts provide investors with specialist expertise in portfolios of real assets but well-intentioned charges disclosure rules have driven both pension funds and retail investors away by providing misleading charges information. They have been required, by charge disclosure rules to mislead investors about when and how the expenses of managing their portfolios are paid.

Unlike a unit trust, or open-ended fund, closed-ended listed companies do not charge for holding their shares. They do of course tell investors what expenses the company incurs to run the fund, but this is all incorporated into the share price, once the stock is owned. No other country has imposed these misleading charge disclosure rules. Unfortunately, since 2018, increasing emphasis on reducing pension fund charges, has forced providers to cut reported charges, often ending up at a basic minimum index-tracking exposure. This has created massive selling of investment trusts on a false premise. Of course, the Directors’ pay and bonuses of a listed company held by a pension scheme would not be counted as an investor cost, so would not be included in any ongoing charges figure, but investment companies have to follow rules that wrongly tell investors they directly pay the company’s lawyers’, accountants’, directors’ fees and so on. That has caused wealth managers and fund of fund managers to sell their holdings, leading to large investment trust discounts and little or no pension (or retail)  buying.

These ideal investment portfolios for holding long-term illiquid infrastructure or other assets, offering unique pure exposure to wind farms, solar farms and so on, have been undermined. This damages us all by weakening our economy and financial markets. The Government and Regulators should immediately stop these misleading charges disclosures, so that investors are offered properly informed choices to back great British firms and smaller growth companies, rather than having capital spent on buybacks or solid investments falling into foreign hands.