UK Chancellor Jeremy Hunt is facing criticism from experts in the pension industry over his plans to increase investments in risky unlisted assets such as private equity and public building projects. Infrastructure investment specialists have warned that without a proper valuation framework, Hunt’s proposals could put members’ retirement savings at risk. Trustees of local government pension plans have also expressed concerns about pooling assets into larger independently managed funds, as they would be held responsible for any investment losses without control over the funds.
Hunt had announced his plans in July, aiming to use billions of pounds from the pension industry to boost private investment in the UK and stimulate economic growth when the government lacks the financial capacity to cut taxes or increase spending. The proposals included unlocking £50 billion of capital for unlisted equities by 2030, as well as encouraging more of the UK’s £1.7 trillion defined benefit funds to invest in long-term, illiquid infrastructure projects. The goal is to generate billions of pounds in additional business investment and improve productivity to match that of European nations.
However, the pushback from experts and industry professionals highlights the challenges that Hunt may face in implementing his vision. The EDHEC Infrastructure and Private Assets Research Institute has warned that defined benefit pension plans in the UK should avoid investing in infrastructure due to the opaque nature of valuations, which makes it too risky. The institute cited the “multi-billion pound loss faced by Thames Water investors” as an example of hidden risks.
To address these concerns, the institute has proposed a valuation system that would make infrastructure a more reliable asset class for long-term investors like pension funds. The Financial Conduct Authority is also looking into valuations of private market assets in order to improve transparency and disclosure.
Hunt is exploring various options to create investment super-funds, similar to those in Australia and Canada, to finance major infrastructure projects in the UK. One option being considered is converting the Pension Protection Fund into a defined benefit scheme consolidator, but this would shift the guarantee from the private sector to the taxpayer, which could pose political difficulties.
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 reduce management costs and create larger funds to finance major UK projects, including a doubling of the allocation to private equity. However, some councils oppose this idea as the cost of any investment losses would have to be borne by taxpayers.
In response to the criticisms, a Treasury spokesman stated that pension funds should have the autonomy to make their own investment decisions. The government’s priority is to secure long-term returns for the benefit of savers, which can be achieved by investing in a diverse range of assets, including unlisted equities.
Some local government officials, such as Quentin Marshall, chairman of the London Borough of Kensington and Chelsea pension fund, challenge the assumption that pooling assets saves money and delivers better returns. The concern is that taxpayers would have to cover any shortfall caused by bad investment decisions.
Keith Onslow, chairman of the pensions committee at the London Borough of Bromley, expressed his worries about having to make up deficits if investments underperform, stating, “We can outsource the management but we can’t outsource the responsibility.”
In conclusion, Chancellor Hunt is facing resistance from experts and local government pension plan trustees over his plans to increase investments in risky unlisted assets. Concerns have been raised about the lack of a proper valuation framework and the potential risk to members’ retirement savings. The government’s aim to boost private investment and stimulate economic growth faces challenges due to the complexities of the pension industry and the potential financial burden on taxpayers.
More detail via The Star here… ( Image via The Star )