The pension megafunds

[AlderBuckthorn]

Should we be worried about the risks of over consolidation or optimistic about the potential for growth?

www.reuters.com/world/uk/britain-eyes-pension-megafunds-super-charge-economy-2024-11-13/

Growth and consolidation are two separate issues and she’s conflating them by putting together.

What do you think would constitute overconsolidation?

Consolidation has been happening across the DC market for several years and broadly speaking is a good thing. It leads not only to greater scale but generally also to lower charges for members and better value for money. As long as it doesn’t constrain choice (and I don’t think this number would) I don’t think it’s a bad thing.

I think the riskiest part is that there is no proven track record for returns on UK infrastructure assets. We cannot compare returns in our sector to those overseas as we are SO inefficient (see HS2). My fear with using pension money towards infrastructure is that it’s throwing good money after bad and will just continue inflating the profits of consultants and outsourcing rather than delivering much good. The govt is absolutely shite at how it spends its own money so I think the last thing they should be telling us is how pension funds should be spending ours (ie they are spending it for us).

@DotPotato has nailed it!

Overconsolidation I thought could lead to fewer schemes, a lack of choice and competition >>> lower returns on our retirement savings. That’s what I got from the Reuters article anyway.

Sorry - I meant what would you define as over consolidation? How many schemes is too few schemes?

I think the riskiest part is that there is no proven track record for returns on UK infrastructure assets
This is right. I’m hoping this experiment is constrained to the local authorities who are final pension as there is no ifs or buts on the final outcome. But if it’s with a normal investment type pension, I’d be worried.

This has prompted me to go check that none of my pensions are in the default investment profile. If I chose US/global stocks they can’t start putting it into UK/European.

I also agree Australian and Canadian examples are bad ones as they’ve natural resources and a much bigger undeveloped country. We’re a small island with fewer opportunities for growth.

A Canadian pension fund has just bought 3 UK airports.... i don't think Reeves is going to limit this type of investment to UK only.

Its also up to the investment managers to make the decisions, not Govt.

I have no idea, I’d love to understand it all better.

She wants them specifically to allocate 5% of assets to UK infrastructure. That was agreed earlier this year.

As for it being investment managers decisions, you’re spot on and this is EXACTLY why they’re not investing in it at the moment……

The schemes being consolidated are public sector - they don't compete for members! You are in the scheme that your employer has. What they do compete for is assets as there are so few good long term assets around. Consolidation should really help.

All your eggs in one basket comes to mind.
Doesn't seem safe to me.

Great call, many people have no idea that their pensions are even invested let alone what they’re invested in.

It’s the whole DC market so yes it is everyone’s pension.

To me this smacks of something that worries me greatly about Labour’s policy making. That they keep conflating two largely unconnected policy areas with the implication that you cannot have improvement in one without commitment from the other. You CAN have better investment returns without infrastructure. You CAN have better economic growth without infrastructure investment (the answer is improving productivity).

It’s like saying you can’t have investment in state schools without taxing private schools. Complete BS (and I have no skin in this game). Anyone who falls for it is a fool.

And I worry that this is becoming a pattern and pensions will go down the same track, thereby making the pensions industry the scapegoat for low economic growth… which they are NOT responsible for. Their responsibility is proving returns to members, nothing more and nothing less. If that can be done in a more productive way great, but it’s a secondary goal not a primary goal. If it comes at the expense of the primary goal (returns) it’s wrong.

We don’t know yet if it will or not which is why it’s a problem.

No she’s also accelerating consolidation in DC multiemployer schemes (private sector) to ensure they have a minimum level of AUM.

Pension funds already invest in the UK and according to the press reports this morning, the Chancellor is not specifying any levels of investment in the UK.... amazingly, a Tory minister is on SKY telling us they support this move.....

My feeling is that is very risky. While it may sound good on paper it's just playing Monopoly. What could go wrong?

It was the conservatives who first proposed it.

They're not talking about investing in the UK. They’re talking about investing in UK infrastructure, which is generally unlisted illiquid long-term assets (although some are listed). To quote, they want to “unlock tens of billions of pounds of investment in business and infrastructure”, “to pursue big-ticket investments like roads, rail and airports”. This is not the same as investing in eg UK listed equities… many of which are actually foreign owned firms but are listed as having exposure to the UK economy (or UK businesses listed overseas).

Also, following the last Mansion House speech (under the Conservative govt) 9 of the biggest fund managers committed to allocating 5% of AUM to unlisted equities, voluntarily, but with govt backing

Well, it doesn't matter what the Tories said or any response to it now.

Why is everyone always against any change? when this move was first mentioned by the Tories, no one gave a stuff....

The proposals have only just been fleshed out, there is no min levy, decisions made by fund managers... the change is to the size of the funds... which may allow more investment in different sectors.

Seems that its ok for Canadian funds to invest in the UK ie airports but not UK ones... mmm

eg we are going to see massive investment in water treatment, lets have some UK involvement not foreign..

That’s not quite right, there was loads of coverage when it was first proposed and the debate was exactly the same as you’re reading in here.

Also I don’t think anyone is against change, as evidenced by the commitment from the big funds earlier this year. I do think it’s right to be sceptical however when decisions around investments become politicised, which is essentially what is happening as Labour’s political future does depend on improving economic growth. If it does work then it’s a win win, the point is we don’t have enough certainty on whether it will which is why then it is of greater consequence to savers than to the govt.

The point above about the difference between Aus/Can and UK is well made.

It doesn't feel right. Government should be in charge of policy and direction, deciding what gets built. It feels 'off' to delegate important projects to others.
It feels like a return to Blair/Brown building of hospitals and schools which was hived off to PFI. They got results (new buildings) quickly but have been over-paying for it ever since.

Pension funds have a fiduciary duty to maximise investment returns for their members. I don't know how the government can compel funds to invest in certain types of investments without changing (and undermining) that core feature. I am concerned about this. People's pension savings shouldn't be used for political purposes.

Personally I think it’s also important to look
at what’s not being said.

At the moment, some of our most important infrastructure eg airports and water companies are foreign and/or PE owned. Without knowing a huge amount about this area, I think this is a huge threat to domestic security for a number of reasons.

Firstly it means we have very little control over what happens to these assets in the event of any significant economic disruption, but it also means that the extent to which investments are made in them is dependent upon foreign owners, who don’t have the implications for UK society and economy at the heart of their decision making process. Even worse, we won’t retain any control over them in the event of something more serious like a conflict of some kind… and where assets are majority owned by foreign investors (some of which relate to state backed investment funds) we cede any control to another foreign power. Extreme I know but it bothers me.

For that reason it makes sense to increase UK ownership of long-term infrastructure and strategic assets even if it doesn’t lead to higher member returns. But I don’t think that’s something that govt would outwardly say, especially as it doesn’t want to be seen to be discouraging foreign investment.

I agree with the foreign control comment DotPotato. I was so relieved when they decided that having the Chinese run Hinkley Point was a bad idea. What took them so long to come to that conclusion!?

They aren't, its still down to fund managers to decide what to invest in, Pension funds carry risk, they can go up or down eg Truss's time in office saw DC schemes lose a great deal of money as gilts lost value.

As far as i can see, the Govt is allowing the conditions for managers to invest in, not ordering them to invest in x or y.

It also seems to only be applicable to the 86 council run schemes, currently run by council officials.

On foreign ownership, thats happened under the old regimes/policies, selling everything off to the highest bidder, these assets are then sold again again.... if a UK airport is good enough for a foreign pension fund to invest in, why not a UK one?

We seem to be heading for more nuclear and more on shore renewables, why not have these backed by UK funds and not Australian ones?

Local Government Pension Schemes are Defined Benefit schemes, so this consolidation shouldn't affect the actual pension that people get, only how the funds that back them are invested.