On the go: The Department for Work and Pensions has made minor adjustments to proposals governing Nest’s ability to invest in government bonds, while maintaining the majority of its proposals controlling “employer-related investments” for master trusts, under a consultation aimed at channelling defined contribution money into illiquids.
For multi-employer schemes, there is currently a limit on trustees and managers investing more than 5 per cent of a scheme’s assets in any one participating employer, with a cap of 20 per cent on the total amount of a scheme’s assets that are invested in ERI.
As the UK government could be considered a connected and associated part of the Nest master trust, Nest’s total exposure to government bonds could not previously exceed 5 per cent.
The government had proposed removing a section of the Application of Pension Legislation to the National Employment Savings Trust Corporation Regulations 2010, which includes a provision that government bonds are not to be seen as employer-related investments for Nest.
“A small number of respondents” said that the removal of this part of the regulations “may not be necessary”, the government said in its consultation response, published on July 19.
“We have considered these responses and agree that this clarification remains helpful,” it said.
“We have therefore amended the part which refers to the 20 per cent easement and reinstated the provision regarding government bonds.”
The government said that the majority of consultation respondents had supported its proposed amendments to legislation aiming at helping master trusts diversify their investment strategies, to include asset classes such as private debt and credit.
Respondents cited onerous compliance and the breadth of ERI rules, with one observing that their scope to include all scheme employers and any linked persons make it hard for master trusts “to conclude with sufficient certainty that a potential private debt/credit investment would not involve the risk of an inadvertent breach of the employer-related loan restrictions”.
The DWP has proposed amending the rules so that they will solely apply “in relation to investment in the scheme funder, the scheme strategist, or a person who is connected with or an associate of the scheme funder or the scheme strategist”.
These rules will apply to master trusts with at least 500 employers — a threshold that the DWP said attracted the most comment from consultation respondents. Two respondents requested a lowering of the threshold, with three questioning its need at all.
The government cited the Pensions Regulator data, which showed a gap between master trusts with at least 500 participating employers and the next scheme below the threshold.
“We believe the risks of a single participating employer having influence over the investment approach increases the smaller the number of participating employers there are in a master trust scheme, and diminishes the greater the number of participating employers,” the government added.
“We believe 500 is the appropriate threshold beyond which that risk dissipates to a negligible level.”
