The Pensions Policy Institute (PPI) has warned that while the UK’s ambitious plan for more private equity investment can be achieved, current policy initiatives could lead to some unintended consequences.
The PPI’s latest report – Pension scheme assets: how they are invested and how and why they change over time — noted that the amount of assets invested in productive finance depends on its definition. Using a much narrower definition that extends only to private equity and alternatives, the Institute estimates that 6% of the £3trn (€3.6trn) of UK pension assets is invested in productive finance.
A broader definition that includes UK listed equities, as used by the Pension Protection Fund, would put the proportion at 12%.
In total, the PPI estimates that £541bn of UK pension assets (18%) is invested in UK businesses.
The Institute said the government’s ambitions for more investment in private equity look “likely to be realised in the medium term”, but pointed out that it is less clear how much of this will be into UK businesses.
“Continuing the trend towards greater diversity in assets relies very much on the current transitions being allowed to work their way through, in particular, the consolidation in the DC sector and the continued use of default funds,” it said.
The PPI report added that the growth in private market assets will largely be driven by the very small number of open defined benefit (DB) schemes in the public and private sectors and defined contribution (DC) funds. However, it warned that the policy currently underway could lead to some unintended consequences.
This include the potential for herding effect with providers all putting money into private equity at the same time, which could have a detrimental effect on asset prices and returns. There is also a risk that disclosing asset allocations could lead to less innovation in the allocation of assets as schemes tend towards the mean.
The PPI also warned that disclosure could lead to a reduction in UK investment if it becomes more evident that schemes that are overweight in the UK are underperforming.
It also said that any attempt to force providers to invest more heavily in certain asset classes is a direct challenge to trustees’ fiduciary duty and can be expected to be met with “considerable backlask”.
The Institute said the government could therefore find itself in conflict with regulators, both of whom put member outcomes at the forefront of their strategies and policy.
Lastly, the PPI said that changes to the lifetime provider model and the small pots initiative could disrupt the current trend towards consolidation and, with funds moving more between providers, could lead to providers needing to emphasise liquidity.
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