UK pension schemes forced to go global

How easy is it right now for UK pension schemes to invest in British companies? This morning’s panel of industry big-hitters is painting a mixed picture in response to the question of the day.

The panellists are: Liz Fernando, chief investment officer of Nest, Morten Nilsson, chief executive of Brightwell, David Hourican, British Business Bank and chaired by John Chilman, chair of the PLSA policy board.

Nest’s Liz Fernando is optimistic. Nest is a signatory to the Mansion House Compact and has a 30% target for illiquid assets.

Fernando says: “I think it could go higher than that; certainly for members a longer way from retirement, there is no reason why they couldn't hold the majority of their assets in unlisted exposure. Some private markets which throw off an income stream fit really well post retirement.”

To meet its fiduciary obligations and deliver risk-adjusted returns to investors, Nest steers clear of the early venture capital stages. “We want to invest in proven business models,” says Fernando.

In response to a spicy question from panel chair John Chilman - how do we negotiate a fee structure which ensures that risk and return is there for members and is not being used to buy yachts for fund managers - Fernando replies that Nest is in a strong position to negotiate on fees. 

She says: “We have been very, very vocal about not paying performance fees. With the charge cap in DC we have had to be very innovative in how we structure funds.

"When we set out to procure an asset manager in a new asset class, everyone has always said, ‘You’ll never do it,’ but every time, they have come to the table. We may not have the Blackstones of this world in our portfolio, but we are very happy with the managers we do have. Knowing you have a steady stream of future income helps.” 

She concludes: “I would encourage people to think about different models and different ways of structuring, because we have shown it is possible. The industry for too long has accepted what the hedge funds have said is the only way of doing it.”

Brightwell’s chief executive officer Morten Nilsson is much more pessimistic about pension schemes’ opportunities to invest in UK businesses. “We are forced to be global because the opportunities haven’t been here, or they haven’t been priced attractively enough for us.

"If we had the opportunities, we would focus on the UK. With a lot of this, political consensus is really important. I don’t think we have certainty on the regulatory side and I think that is quite problematic.”

David Hourican adds: “The government needs to be a bit more catalytic: be it tax breaks or structural efficiencies, there is a real opportunity.”

Is DC the right answer?

The panel speculates about whether the pendulum will swing back from the individualism of DC to the paternalism of DB. Nilsson thinks that change will come. He says: “DC just isn’t the answer. Right now, this is the best we can do. But we are asking people to make so many decisions. They stand there and ask ‘what can we do?’ and there are no attractive products available. I like the idea of sharing longevity risk. What can mess it up is when you start to get too detailed about it.” 

He expands: “In a funny way, our enhanced annuities and all these sorts of things are very fair to the people who are getting them but they are also ruining the solidarity and the benefit of sharing risk. AI will help us but at the moment you are diluting a lot of risk-sharing value. We need to move on from DC because it is not the right solution.”

John Chilman adds: “The big value of DB was pooling, risk and longevity sharing. Of course there are winners and losers when that happens but overall it adds benefit to what people receive.”

Fernando also thinks the system needs to change. “We think post-retirement there is a very strong case for looking at pooling, mortality, risk sharing. We are still doing the thinking as to the best way of doing that and how feasible it is.” 

She caveats: “The challenge with pooling across whole of life is intergenerational fairness. If you look post-retirement you could narrow people into narrower cohorts. We have target date funds for each expected retirement year; whether you would pool people within that fund or within several of those funds, or everyone post retirement - all of that is up for debate. But then you are investing for average life expectancy, not the worst possible life expectancy, and that has to be advantageous and allow us to take more risk than if it were just for one life.”