Unpack pension reform and its market impact with Simon Wood and Jade Murray. Will it be a home run for liquidity in the UK capital markets? Listen to find out.
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Simon Wood
Welcome to Mergerspresso, AG's Corporate Finance soundbite. This week we're covering pension reform in the time it takes to make your coffee.
Rachel Reeves has stridently proclaimed pension reform as the key to unlocking liquidity in the capital markets. Does this really stack up?
I'm Simon Wood and I'm delighted to be joined by our pensions guru, Jade Murray. Jade, three questions for you.
Firstly, the government wants large pension schemes to invest more in the UK economy, claiming this is a win for both pensioners and businesses. Is that an appropriate aim?
Jade Murray
Thanks Simon. Well, the short answer is only if you would have made that investment irrespective of what Rachel Reeves wants or any desire to support the British economy. Essentially, trustees must invest prudently in the financial interests of their members, and that already allows for investments in UK public or private markets.
But one of the most famous cases on pension trustee investment duties says very clearly that it is unlawful for trustees to shape their investment strategy just to align with government preferences or what's best for Britain. So neither pension trustees nor pensions or trust law are a genuine constraint.
The government should instead look at the investment climate and pensions regulation for better answers to why the UK lags some other countries for the amount of pension capital invested at home.
Simon Wood
So what is the government proposing to do to reform pensions?
Jade Murray
There are quite a lot of proposed reforms in the works, but there are two main strands really, and that's consolidation and increased investment in private markets.
So, on consolidation, the government wants to force most company DC pension schemes to transfer their assets to a handful of dominant commercial pension providers to give those providers increased scale. And it then wants to do the same thing with local government pension schemes by forcing them to merge and increase their asset pools. So, that's the consolidation play.
The government also wants to encourage and possibly if that doesn't work, maybe mandate, greater pension investment in private markets, including private equity, venture capital, infrastructure and other so-called higher risk, higher return asset classes. Last year we saw the pension regulator issue, a bit of a regulatory nudge to pension trustees in that direction.
Now, there have been some pretty spurious numbers bounded around by those advocating for these reforms in terms of the supposed upside for pension fund returns and also a bit of a failure to talk about the potential for diminished returns from higher fees and failure rates. But equally, to the extent the better outcomes for members can be obtained from these asset classes, then clearly there's a desire to capture that.
Simon Wood
So will these changes actually increase liquidity in the capital markets?
Jade Murray
Well, the thrust of the reforms are more focused on illiquid rather than liquid investments.
I think we'll continue to see increased investment in things like infrastructure, social housing and retirement living, but I think that's more likely to be driven by the big pension insurers who are benefiting from vast capital inflows from all the DB schemes that are being wound up.
There's no issue now with DC pensions investing in UK PLC shares, and many do, but in line with their investment advice, many pension trustees are invested in global equity funds and trackers rather than UK equity because that's where the better growth has been.
So if I was Rachel Reeves, I think I'd stop kicking pension trustees, who I think generally do a pretty good job within the legal framework they're subject to, and look instead at how to make UK investment more attractive in its own right.
Simon Wood
Thank you, Jade, this is going to run and run. We're taking a short break for Easter, but join us later on in the spring for the next season of Merge Espresso.
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