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Pension Investments

Volume 835: debated on Tuesday 23 January 2024


Asked by

To ask His Majesty’s Government whether they plan to encourage UK pension investors to increase support for (1) long-term UK growth, and (2) UK financial markets.

My Lords, the Government are delivering a series of measures to reform pension fund investment, strengthen the UK’s competitive position as a leading financial centre and support long-term UK growth, building on the Chancellor’s Mansion House package of reforms. These measures include an industry-led compact whereby 11 of our largest defined contribution schemes have committed to the objective of allocating at least 5% of their default funds to unlisted equities by 2030.

I thank my noble friend for her Answer. However, the Mansion House reforms focus only on unlisted companies and do not require the investing of a penny in the UK itself. Will my noble friend agree to meet with me and like-minded peers, who are concerned that there are ready-made portfolios in UK-listed investment companies, trusts and REITs that are already investing in wind farms, solar farms, sustainable energy projects and other infrastructure that could be used for pension investments to support UK growth and revive confidence in UK markets? Does she agree that the current problems with charges disclosure have driven pension funds to invest in overseas infrastructure rather than our own and we urgently need to address that, either through a statutory instrument or my Private Member’s Bill?

I should be delighted to meet with my noble friend to discuss these matters further. The UK has a world-leading investment trust sector representing over £250 billion of assets and is highly aligned with the Government’s priority to promote long-term productive investment. She will know that at the Autumn Statement, the Government published draft legislation to replace the packaged retail and insurance-based investment products, or PRIIPs, regulations. We also announced that we will bring forward the repeal of the relevant provisions of the Markets in Financial Instruments Directive. This will enable the FCA to put in place more proportionate cost disclosures.

My Lords, I am keen to see increased domestic investment in the UK economy, but is it appropriate to put pension money from small pots—people who cannot afford to lose part of that pot —into liquid, high-risk start-up investments, as the Mansion House compact seems to contemplate?

There are two things about that question. First, having a very large number of pension pots under £1,000—I believe that there are now 4 million—is not a good way to manage pensions. We need to make sure that we can consolidate those into much larger schemes that can diversify their investments much better. However, the UK has a very poor record on pensions investing in unlisted securities, running at about 0.5% of pension pots. In Australia, the figure is 4.9% and in Canada, although it is not directly comparable, it is over 15%. Just because something is unlisted and illiquid does not mean that it cannot offer good returns over the long term.

My Lords, I direct the House to my entry in the register of interests. Investment funds have flowed out of listed UK equities for the past 30 consecutive months. When is this going to stop?

The Chancellor and indeed the Government have put forward a number of reforms to ensure that we make the UK the best place not only to raise capital but to invest pensions in future. As I am sure the noble Lord has seen, we have been delivering on the recommendations of the noble Lord, Lord Hill, for overhauling the UK’s prospectus regime, we have been looking at the recommendations of Rachel Kent’s investment research review and we have been developing a new type of trading venue that will act as a bridge between private and public markets. We can be innovative, but this is a process of evolution not revolution.

My Lords, I declare my interests as in the register. In their green financial strategy, the Government recognised that clarifying the fiduciary duties of pensions investors, which could help to increase support for long-term and sustainable investment in the UK, was needed. When will the Financial Markets Law Committee, which is reviewing the clarity of the law relating to fiduciary duty, be publishing its report?

I am grateful to the noble Baroness for raising this issue, about which I had a meeting last week with a number of fund managers. Some felt that the fiduciary duty needs to be changed, while others were content with it. The Government remain committed to considering how the fiduciary duty can be clarified. The financial markets group that she referenced is independent of government and includes various law firms and pension schemes. We look forward to the publication of its final report, but, as I say, it is independent of government and it will publish its report when it is ready.

Does my noble friend not agree that this issue needs not just a meeting with the noble Baroness, Lady Altmann, but wider discussion in this House? It is incredibly important to facilitate investment in UK plc. The issue is not unlisted investment; it is investing in the UK market, and it is not just about defined contributions. What progress has been made in respect of direct benefit in encouraging local government pension schemes to invest in UK plc?

I would be more than happy to take lots of debates on this issue because it is incredibly important, and the Government are making great strides in this area. For example, on local government pension schemes, hundreds of billions of pounds has been invested for employees’ longer-term pensions. They are invested in pots that are too small; they need to be bigger, so we have set a deadline of March 2025, when we want to see local government pension schemes consolidate into fewer asset pools of greater than £50 billion. We expect that, by 2040, those pension schemes will be invested in pools of around £200 billion. With that sort of money, it is really easy to diversify.

My Lords, when the Labour Party sought to amend the Financial Services and Markets Bill to encourage pension funds to invest in high-growth businesses, the Government opposed our amendment, so the Chancellor’s recent announcement that he is now following our lead was most welcome. However, the Mansion House compact does not, as many noble Lords have said, ensure that the unlocked capital is invested in UK equities, rather than finding its way overseas. What steps will the Government take to incentivise pension funds to put their wealth into the British economy by backing UK assets?

I am not aware of the detail of the amendment to that Bill tabled by the Labour Party, but we are taking a very measured approach to market intervention. It is clear to me that we need to do this and, as I said previously, it is evolution not revolution. However, there are many ways in which the Government are focusing on UK high-growth companies in particular. I point the noble Lord to LIFTS, or long-term investment for technology and science—investment vehicles tailored to direct contribution schemes. The Government will coinvest in or support those schemes up to £250 million. The bids have already been submitted, and we expect those funds to be operational and investing in UK growth companies by mid-2024.

Does my noble friend agree that, whatever the pension funds invest in—and we certainly need them to get back to the 40% they once put into Britain, rather than today’s 4%—and wherever they put their money, they are not going to be attracted by very long-term, politically high-risk projects which turn out not to be an investment at all? Is that not a reason why we should encourage giving priority, in our nuclear recovery, to smaller, quick-build machines, rather than sinking all our money into very long-term large structures which may not work even when they are built?

My noble friend makes the very important point that investment is always about diversification. We need a wide range of projects and vehicles to encourage the UK economy, and some of those may indeed be of the sort he refers to.

My Lords, does the Minister believe that consolidating pension funds will lead to an increase or a reduction in the fees paid by pension savers?

I would expect the cost to be lower because, on the value for money framework, for example, which the FCA will consult on shortly, we are proposing direct contribution schemes. If they are not making the sort of overall returns that savers could reasonably expect, they will be encouraged to wind down or consolidate. Of course, in those overall returns, one always does put cost. It is true that the cost for each saver is lower for larger schemes.