The Financial Conduct Authority (FCA) will launch a consultation on updating the permitted links framework to allow unit-linked pension funds to invest in an appropriate range of so-called ‘patient capital’ assets.
The consultation is expected by the end of 2018, according to the Autumn Budget 2018 document unveiled on Monday (29 October) following chancellor Philip Hammond’s Budget speech to the House of Commons.
According to the document, the consultation will accompany the ongoing work of the HM Treasury’s Asset Management Taskforce to explore the feasibility of a new long-term asset fund.
Several of the largest defined contribution (DC) pension providers in the UK have already committed to work with the British Business Bank to explore options for pooled investment in patient capital, including Aviva, HSBC, Legal & General, NEST, The People’s Pension, and the Tesco Pension Fund.
According to the Budget document, with total assets under management expected to exceed £1trn by 2025, DC pension schemes have a “vital role to play in long-term financing for UK growth and investment”.
Hymans Robertson head of DC consulting Mark Jaffray said: “The Chancellor has quite rightly shone a spotlight today on improving access to finance for the UK’s innovative firms and infrastructure projects, including encouraging DC schemes to include them in their investment strategy.
“A move in this direction is welcome as it’s important that the barriers faced by DC schemes looking to invest in more illiquid assets, such as these, are reduced.
“Today’s low yield and low contribution environment means that schemes’ DC investment strategies need to work harder to generate the returns required.”
Charge cap
The same document noted that Department for Work and Pensions would consult on the function of the pensions charge cap to ensure that it does not unduly restrict the use of performance fees within default pension schemes, while maintaining member protections. This consultation is expected to open in 2019.
Jaffray also welcomed the chancellor’s commitment to consult on the relevance of a charge cap as he encourages greater investment in patient capital.
“While the charge cap has largely been a positive force, particularly in driving better value for members, it can prohibit investment in illiquid assets which are expensive to transact and manage.
“Even for larger schemes which have the necessary scale to drive down fees, an allocation to illiquid assets would generally only be between 10% and 20% of the portfolio.”
He added that a review of the charge cap makes sense if the chancellor is looking to increase this allocation.
“Investments such as infrastructure and private equity not only offer the potential for additional returns (which is vital in the early stages of DC investment) but also help to diversify portfolios, a key component of managing risk.”