Asset Managers Attack Plan to Force Pensions Into UK Growth Fund

There is mounting opposition among fund managers to proposals to force them to hand over billions of pounds of people’s pensions savings to a fund intended to boost the UK economy.

(Bloomberg) — There is mounting opposition among fund managers to proposals to force them to hand over billions of pounds of people’s pensions savings to a fund intended to boost the UK economy.

Plans to create a £50 billion ($61.8 billion) Future Growth Fund which have been championed by Nick Lyons, a City veteran who is currently Lord Mayor of London, risk fading following an avalanche of criticism from firms, according to industry executives.

The main opposition is directed at the proposal of a government mandate for defined contribution pension funds to hand over a proportion of the money they manage to the new vehicle, according to the people familiar with the matter, who asked not to be identified.

A growing number of fund managers are speaking out against the idea, saying that any mandate could clash with their fiduciary duty to invest in the best way possible for their clients. Executives at Aegon, Aviva and abrdn Plc are among those voicing their concerns.

“Forcing all pension schemes to invest a proportion of their funds in a prescribed asset, such as the proposed Future Growth Fund, could be the start of a path down a slippery slope,” said Steven Cameron, Pensions Director at Aegon. “Pension funds are invested by trustees or scheme providers to meet the best interests of members and beneficiaries and anything which goes against this would be a fundamental change.”

The Lord Mayor also heads the City of London Corporation, the governing body of the Square Mile. The City Corporation said that mandating is just one of the options. 

“We’d prefer a voluntary agreement or a pledge of some kind to increase investment in these UK asset classes,” a spokesperson said in an emailed statement. “There also needs to be greater consideration on how to incentivize firms to take action such as tax breaks.”

The UK had about £2 trillion in pension assets at the end of 2022. The bigger pool is made up of defined benefit funds, where payments in retirement are guaranteed at a fixed level, but is mostly closed to new investment. Defined contribution schemes, whose benefits are determined by asset performance over their lifetime, are growing in size and are the government’s main target.

While mandating a slice of those funds is seen by many as controversial, there is increasing debate about whether the tax benefits afforded to pension savings give the government the right to demand a portion of them is directed at supporting the UK economy. 

Nigel Wilson, chief executive of Legal & General, said “soft compulsion” was needed to get pension funds to invest in UK growth companies. There could be a “nudge” to trigger the change, he said at a Wall Street Journal conference Wednesday.

The debate comes as the government is stepping up attempts to encourage the UK’s pensions industry to commit more funds to UK growth companies and infrastructure projects as part of a wider reform agenda that includes simplifying company listings rules, allowing higher pay for performance and encouraging more analyst research of medium-sized companies.  

Potential Compact

Pension funds and the bodies that represent them have been in talks with the government to try and understand what assets politicians want them to invest in, according to a person with knowledge of the discussions. Various ideas have been put forward for reforms to both public and private pensions, including consolidating thousands of small defined contribution funds to create superfunds similar to Canadian and Australian schemes. 

“The driving forces behind how UK pension assets have been invested over time are wide ranging and complex,” said Rob Andrew, Head of Insurance Solutions at abrdn Plc. “Any change to the rules around investing pension assets should remain consistent with the primary objective of pension saving.”

Asset managers opposed to the idea of compulsory contributions are instead discussing a potential compact – an agreement to have serious intent to invest in infrastructure, early stage businesses and green technology, according to people familiar with the matter. This type of pledge would demonstrate commitment to plow funds into these areas without being compelled to direct people’s money into certain areas, the people said.

Jeremy Hunt, the chancellor, is expected to use his Mansion House speech in the City of London in July to set out ambitions for swathes of UK’s pension funds to be directed into riskier assets to boost the country’s start-ups, while also creating higher returns for the savers.

Shadow Chancellor Rachel Reeves said this week in an interview with the Financial Times that she wouldn’t rule out forcing pension funds to invest in a national growth fund. In a separate interview with Bloomberg TV she said the main opposition Labour Party plans to reform pension rules to boost stock listings in London.

UK Labour Plans Pensions Reform to Boost London Stock Listings

“Anything is possible in theory, but mandating schemes to invest into a particular fund, I would say, is practically impossible,” said Andrew Clare, professor of asset management at Bayes Business School.

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