UK Pushing Pensions Into Private Equity Draws Industry Backlash

UK Chancellor Jeremy Hunt is facing a pension industry backlash over plans to push more savings into risky unlisted assets like private equity and public building projects.

(Bloomberg) — UK Chancellor Jeremy Hunt is facing a pension industry backlash over plans to push more savings into risky unlisted assets like private equity and public building projects.

Experts in infrastructure investment have told Hunt his proposals would put members’ retirement savings at risk unless a proper valuation framework is developed. Local government pension plan trustees have also warned they are reluctant to “pool” assets into larger independently managed pots of money as doing so would leave them responsible for investment losses without control of the funds.

Hunt outlined plans over the summer to harness billions of pounds from the pension industry for private investment in the UK, part of a government drive to kickstart growth at a time it lacks the fiscal headroom to cut taxes or spend. In July, Hunt announced a “compact” with defined contribution pension plans to to unlock £50 billion ($60.7 billion) of capital for unlisted equities by 2030 and a consultation on encouraging more of the UK’s £1.7 trillion defined benefit funds into longer term, illiquid infrastructure projects. 

The goal is to generate billions a year in additional business investment to pull the UK into line with European nations and boost productivity. The pushback shows the difficulty Hunt is likely to face in realizing his vision.

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The defined benefit consultation closed last month ahead of a likely announcement next month but experts at the EDHEC Infrastructure and Private Assets Research Institute have warned that “defined benefit pension plans in the UK should abstain from investing in infrastructure” because opaque valuations make it too risky. 

Hidden Risks

In its response to the consultation, the institute cited the “multi-billion pound loss faced by Thames Water investors” as an example of the hidden risks. It said the “remarkably poor and unreliable” quality of data available to investors was “a major stumbling block” for more private asset investment. 

EDHEC has proposed a valuation system that it believes would make infrastructure a more reliable asset class for long-term investors like pension funds. The UK’s Financial Conduct Authority is also looking into valuations of private market assets to improve transparency and disclosure. 

Hunt is considering a number of other options to create Australian and Canadian style investment superfunds that could finance major British infrastructure. One option under is turning the industry lifeboat, the Pension Protection Fund, into a defined benefit scheme consolidator. 

But John Ralfe, an independent pensions specialist, said that would mean shifting the PPF guarantee from the private sector to the taxpayer, which would be difficult politically. 

Consolidation Plans

Local authorities are also skeptical about Hunt’s plan to consolidate £364 billion of local government pension scheme assets by 2025. The aim is to lower management costs and create bigger pots of money to finance major UK projects, including a doubling of the allocation to private equity to 10%..

Roughly 40% of local government assets have been transferred into pools but a number councils oppose the idea. 

Quentin Marshall, chair of the London Borough of Kensington and Chelsea pension fund, said the council has “to put the interests of the fund ahead of any other considerations” and that he “would challenge” the assumption pooling saves money and delivers better returns.

One sticking point is that the cost of any shortfall caused by bad investment decisions has to be met by taxpayers.

“We can outsource the management but we can’t outsource the responsibility,” Keith Onslow, chair of the pensions committee at the London Borough of Bromley, said. “The nightmare is someone invests in something and we have to make up the deficit.”

A Treasury spokesman said that pension funds “should make their own decisions on how they allocate their assets. The government has been clear that the priority should be securing long term returns, for the benefit of their savers,” and this can be “achieved by investing in a diverse range of assets, including unlisted equities.”

Onslow sees little reason to increase the private equity allocation. “If these were good investments we’d be doing it already,” he said.

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