Rachel Reeves has once again come under fire, with her pensions megafund set to bring savers a ‘tiny’ return over three decades.
Both the Chancellor of the Exchequer and her predecessor Jeremy Hunt have been eyeing some of the cash held in UK pension funds, estimated at just under £3 trillion, as a source of funding for UK private equity and infrastructure investments.
These types of investments, which also include so-called productive finance, are considered more risky because they tend to invest in less liquid assets which cannot be cashed in as easily as shares or bonds.
However, they have the potential to deliver better returns for savers over a longer term.
The Department for Work and Pensions estimates four per cent of the cash held in workplace pensions is invested in private equity and infrastructure assets.
Reeves’s goal is to ahvew with 10 per cent of assets allocated to infrastructure and five per cent to private equity.
After the Chancellor’s Mansion House speech, the Department for Work and Pensions (DWP) and the GAD, the government’s actuarial department published a report which looked at how the plans would benefit savers.
The report found that more investment in private markets had the potential to grow pension savers’ cash more but it came with “considerable uncertainty” – delivering just 2 per cent more over 30 years than a “baseline” portfolio which invested in UK equities whjch are established companies listed on the London Stock Exchange.
GAD’s investment lead Christophor Ward said: “We informed the government of possible options, assumptions and outcomes related to DC pension investment approaches.”
Pension experts have pointed out that private markets are a niche and expensive asset, but fans of it claim that if managed correctly it can benefit savers more.
Tom McPhail, director of public affairs at the lang cat, a pensions consultancy, said: “Whether it actually leads to economic growth will also depend on if pension scheme trustees can be convinced to support the plan to pump money into infrastructure and unlisted assets. And that’s a big if. The idea that the government has spotted an investment opportunity that the entire pensions industry has previously missed seems like wishful thinking.”
Investing in private equity, is specialised and research heavy. As well as hefty annual management fees it can include performance fees of 20 per cent over what is known as a hurdle rate.
There may be other fees involved as some of the research and investment admin is carried out by third party companies.
Performance fees operate over a hurdle rate, this means the manager gets zero performance fee until the fund has met a set level of growth, and for private equity this can be seven to eight per cent per year.
These types of fees means trustees, the people who are paid to oversee the investments and act on behalf of savers, often avoid investing in them.
There is an argument that costs could come down as pension funds plough more money into them.
At a pensions conference last monthly Louis Taylor, chief executive of the British Business Bank (BBB), urged pension providers to invest more in UK private equity.
“The UK has world class innovation ecosystem and our entrepreneurial culture, whic generates some of the most exciting investment potential.”
Taylor, who spoke at the Pensions and Lifetime Savings Association’s (PLSA) in Liverpool cited examples of breakthrough British companies such as Revolut and Lendable, and Accurx, a system used to book Covid vaccines.
“Companies like these are key to driving future growth and prosperity in our economy.
“Of course, people concerned about their own retirement income.” “But I am sure they will also want to know that the way their money is invested will support the economy and companies from which their children and grandchildren will benefit in future, through employment and growth.”