Problems in the investment trust market are causing difficulties for many UK pensions schemes and could make it harder to meet government objectives to increase investments into infrastructure and private equity to help boost the UK economy.
Former pensions minister Ros Altmann, who sits in the House of Lords, is calling for ministers to intervene. She says this situation is damaging market stability and the UK’s competitive position within the financial services sector. Altmann says she is working with fellow peer Baroness Bowles and other industry experts to help resolve this issue.
The problems in the UK investment trust market have arisen as a result of the way these companies now have to disclose their charging structure.
Altmann says this is a result of EU cost disclosure rules — known as PRIIPS — but points out it is just UK firms interpreting these rules in this way. This is despite the fact the UK has now left the EU and the government says it plans to drop this legislation anyway.
However at present these rules – which require firms to show a number of ‘hidden’ costs, such as dealing and transaction charges – have meant many investment trust companies now show charges of 1.5 per cent, whereas prior to this PRIIPS regulation they displayed charges of 0.75 per cent. Altmann says this latter changes is a more ‘realistic’ reflecting of actual charges.
These higher disclosed figures have led to funding issues for some trusts, causing share prices to dip and discounts to widen on these listed vehicles. As many large workplace pension schemes have charge caps this has led some schemes to sell their holdings in UK investment trusts, which have also been dropped for some comparison tables, further exacerbating funding issues.
Altmann adds that managers of UK pension funds have confirmed this is a problem in the market at present.
Altmann points out this is a particular issue given these closed-end listed trusts have historically been well placed to access infrastructure, private equity, real estate and other less liquid investments. As she points out in his recent Mansion House reforms the Chancellor has clearly stated he wants to see more pension investment in UK infrastructure and net zero transition businesses.
She says: “Many pension funds could not achieve sufficient diversification if investing in individual projects directly, and they do not have specialist expertise. UK investment trusts have focussed on these specific sectors to raise capital for long-term investments, so using tried and tested investment trusts would enable pension funds to invest for the long-term with less risk.
“Closed-end companies are more suited to patient capital than open-ended vehicles, as they do not have to sell underlying illiquid assets if a few investors need to withdraw capital.
“The UK investment companies sector is a highly innovative part of the global financial ecosystem, and a distinctively British success story. These are ready-made vehicles for exposure to alternative energy, infrastructure and housing projects, alongside the new Long Term Asset Funds (LTAFs), once these are set up.”
She adds that these problems are potentially causing wider issues for the UK stockmarket — which could impact on pension scheme valuations. Investment trusts make up around 36 per cent of the FTSE-AllShare so falling prices have the potential to impact the market as a whole.
“The crisis in investment trust pricing, which has led to substantial share price falls and large discounts opening up, even though the underlying investments are doing well, has been another factor undermining UK financial markets, driving investors abroad.”
Altmann criticises both the FCA and the Investment Association (IA). The IA issued this new charging guidance in 2022, instructing investment companies to include these additional costs in their charges disclosure document. Altmann says: “This is a unique interpretation of the EU’s MIFID regulations. The Investment Association says it has used wording from the FCA, while the FCA claims this is purely a matter for the Investment Association.”
She points out this is particularly damaging considering EU-based firms, including some larger investment companies, are not following this guidance, which has put many smaller UK-based trusts at a disadvantage.
She says: “This particular problem has been entirely artificially created by forcing only these UK firms to disclose charges in a misleading manner. If the FCA will not act ministers must intervene urgently.”
She called for the FCA to announce publicly that it believes the 2022 IA guidance is not required and need not be followed, due to the adverse impacts on market stability and competitiveness.
