Editorial: The chancellor’s Autumn Budget provided a gloomy prediction of an economy bruised by Brexit, and aimed to set out an industrial strategy to get the UK back on track – with the help of pension fund money.
It is part of a wider industrial strategy. Chancellor Philip Hammond is also targeting better research and development, and better standards in ‘hard’ subjects like maths.
As other pots of money dry out, pension funds are once more looked to for support in the government’s endeavour of creating growth, with the Treasury asking schemes to invest in so-called ‘patient capital’ – illiquid assets that only provide a return after several years, such as infrastructure or private equity.
Many defined benefit pension funds have already allocated small percentages to infrastructure or private equity, the first often looked at favourably by schemes for offering income and inflation protection. Some industry experts are also in favour of schemes having a positive societal impact.
However, there is no guarantee that fiduciaries of member money would look only to the UK for such investments, or indeed that they have a large enough portfolio and governance budget to diversify into niche areas that require a lot of oversight – even if they did, they might not all see it as a good investment.
The government would like schemes to be more ‘risk on’ with their portfolios, but low yields, employer pressure and cash flow issues have combined to drive most DB funds in the opposite direction.
For example, Sony’s UK scheme agreed a buy-in earlier this year, as we can exclusively reveal, while the London Borough of Islington pension fund is mulling downside protection through an equity collar strategy.
As for defined contribution, the potential is there. But as experts have pointed out, patient capital for DC would need to be in default funds – in combination with cheaper assets to fit into the charge cap – to gather sums that are anything other than insignificant.
Sandra Wolf is editor at Pensions Expert. You can follow her on Twitter @SandraCWKand the team @pensions_expert.
