Think tank calls for UK long-term investment vehicles

The UK government should introduce a new investment structure to foster the creation of large pools of “patient capital”, which would bypass the “complex” process of merging pension funds, a think tank has said.

The proposal is one of six policies the think tank, Tomorrow’s Company, recommended in a report commissioned by the All Party Parliamentary Corporate Governance Group (APPCGG) for input into its submission to the government’s consultation on corporate governance reform.

The think tank also recommended that shareholders in listed UK companies be allowed to designate a certain stake as a “stewardship stake”, which would come with two-year lock-up and other requirements but offer double voting rights on remuneration at AGMs.

Double voting rights exist in some other European countries. The French government, for example, introduced a law in 2014 under which double voting rights are granted to investors who have held shares for two years in a French company, unless this is prohibited by a company’s by-laws.

Pension fund mergers ‘too difficult’

The think tank envisaged “long-term capital trusts” (LTCT), a new investment structure to pool long-term assets from multiple investors.

“The aim is to create larger pools of patient capital without the difficulty of merging existing pension funds, which is compatible with a defined contribution [DC] world, and works with the existing reality of significant foreign ownership in the UK,” it said. 

“The balance of incentives and obligations would need to be struck to attract capital and to have a meaningful impact on capital allocation,” it added.

It acknowledged the pooling of local government pension scheme assets that is underway and said this goes some way to achieving greater scale, but that “in general, merging pension funds is too difficult to implement more broadly”.

LTCTs, Tomorrow’s Company said, would be regulated closed-end vehicles created by a combination of large UK asset managers and the non-profit entities behind DC master trusts. They should aim to exceed £10bn (€11.7bn) within five years and only a few of these should authorised, so that they achieve sufficient scale.

The investment vehicles that the think tank is proposing are similar to European Long-Term Investment Funds (ELTIFs), but whereas the latter are mainly focused on private equity, infrastructure, and small companies, the target asset class for the LTCTs is UK listed equities.

The think tank said that “it may be useful” for the government to require UK pension funds to allocate a minimum amount to the new entities to “kick-start” the fundraising, suggesting 1%-5%. This could be varied “according to the maturity and liquidity requirements of the pension scheme”, Tomorrow’s Company added.

It acknowledged that this could be controversial, saying that “mandating how a portion of pension assets are invested could be considered too high a level of interference by the government”.

The think tank also suggested linking allocations to the new investment entities to the Pension Protection Fund (PPF) levy as a way of attracting capital from pension schemes, with those schemes investing in the LTCTs paying a lower levy.

“Investment in LTCTs would support the UK economy and hence reduce the systemic risk to UK pensions,” said The Tomorrow’s Company. “It is therefore natural that the government should incorporate this into the level of the levy for each pension scheme.”

‘Expand and strengthen’ UK Stewardship Code

Other policy recommendations from Tomorrow’s Company are to change – “expand and strengthen” – the UK Stewardship Code to set out the different responsibilities for the various actors in the investment chain, namely asset owners, investment consultants, asset managers, and companies.

The government should also require companies above a certain size to introduce a stakeholder advisory panel, broaden the remit of the remuneration committee and streamline the Governance Code for companies, according to the think tank.

Overall, it said the government should avoid only focussing on executive pay “and the few bad apples that make the headlines” and instead “concentrate on positively supporting and encouraging companies to create sustainable wealth for shareholders and society”.

Jonathan Djanogly, chairman of the APPCGG, said the report “contains many interesting and radical ideas”.

“It is hugely important that, as a country, we get this right,” he said. “We want to encourage best practice and create the environment in which wealth creation can flourish. We don’t want to overburden business with unnecessary regulation but we do want to be sure that all in society can benefit.”

The think tank said its report is being debated amongst members and supporters of the All Party Group and a number of its recommendations will form the basis of the APPCGG’s submission to the government’s green paper on corporate governance.

The report can be found here.