Editor’s note: A few weeks ago, I penned an article questioning why so much time was being taken up debating whether investment trusts should be included in the Pension Schemes Bill. Alex Denny, a non-executive director of the Association of Investment Companies, took the time to write this riposte.
The UK government has gone hell for leather in encouraging defined contribution (DC) pension schemes to invest more into productive assets such as infrastructure, private equity and venture capital. The current drafting of the Pension Schemes Bill risks undermining this ambition by excluding one of the main structures already used to invest in exactly those assets.
While few in the pensions or investment industry would disagree with policymakers’ goal of widening the range of assets held by pension schemes to include private investments, the prospect of compelling schemes to allocate to private markets is more controversial. Strong support has already been demonstrated for productive finance through the Mansion House Accord, signed by 17 of the largest workplace pension providers last May, and many argue there is already sufficient momentum without government direction of asset allocation.
“Investment trusts have long provided a practical and well-governed route into private markets, combining professional management and diversification with the transparency of public markets and daily liquidity for investors.”
Alex Denny
Yet the Pension Schemes Bill continues its progress through parliament. It is therefore strange that its current drafting risks undermining the government’s ambitions by excluding investment trusts from the very framework designed to encourage or enforce such investment.
Why trustees should be worried
Under the bill as currently drafted, assets that qualify for the new productive finance regime cannot include securities listed on a recognised investment exchange. The intention behind that restriction is understandable. Policymakers want to avoid counting the purchase of ordinary listed equities such as utilities, housebuilders or asset managers as productive finance when in reality it simply represents trading existing operating businesses.
The difficulty is that the rule does not distinguish between operating companies and listed funds, whose sole purpose is to hold and provide capital to productive assets.
Investment trusts and other listed investment companies are pooled investment vehicles providing long-term capital. Many specialise in exactly the kinds of assets policymakers are trying to channel pension capital towards, including infrastructure, renewable energy, private equity and private credit. However, under the current framework, they are excluded purely because of their structure.
For pension trustees, that should be a source of concern. Investment trusts have long provided a practical and well-governed route into private markets, combining professional management and diversification with the transparency of public markets and daily liquidity for investors.
For DC schemes in particular, where liquidity management and operational simplicity are essential, they can complement traditional private funds and newer semi-liquid structures while helping to bridge the liquidity gap.
Removing them from the policy framework does not broaden access to productive assets. It narrows it.
Sounding the alarm Bell
The concern is not confined to a handful of market participants. Earlier this month, more than 300 industry figures and organisations wrote to pensions minister Torsten Bell, warning that excluding listed investment companies risks reducing the range of private assets available to pension schemes and undermining the wider policy objective of increasing long-term investment.
“If the government genuinely wants pension schemes to invest more in productive finance, trustees should be trusted with the flexibility to use the full range of vehicles that provide that exposure, including listed investment companies.”
Alex Denny
One argument offered for the exclusion is that buying shares in an investment trust in the secondary market does not provide new capital for underlying assets. It sounds compelling, but it is incomplete.
Investment companies operate as permanent pools of capital supporting a sector and have long histories of recycling capital into new projects as existing assets mature. When demand increases, discounts narrow and companies can issue new shares or launch new vehicles, raising fresh capital for infrastructure projects, renewable energy assets or private equity portfolios.
Meanwhile, many of the newer structures designed to channel pension money into private markets are themselves purchasing portfolios in the secondary market. Most Long Term Asset Funds, for example, reference secondary positions in their prospectuses to help flatten the J-curve.
None of this is to argue that investment trusts should be the only route for pension schemes into private assets. Other structures will clearly play an important role. But good policy should focus on economic substance rather than legal wrappers.
If the government genuinely wants pension schemes to invest more in productive finance, trustees should be trusted with the flexibility to use the full range of vehicles that provide that exposure, including listed investment companies.
Otherwise, when the pensions bill finally comes due, both trust and trusts may have been left off the balance sheet.
Alex Denny is a private and public markets consultant, non-executive director of the Association of Investment Companies and a former trustee of Fidelity’s UK Employee Pension Plan. He is also an independent non-executive director of Margetts Fund Management and Aurora UK Alpha PLC.
