The FCA will lead the consultation on whether rules should be changed to allow defined contribution schemes to invest in new technology and infrastructure assets.
This consultation was revealed in the Autumn Budget, and is expected by the end of the year.
Currently most unit-linked pensions are unable to invest in these so-called ‘patient assets’, but the chancellor is keen to unlock the billions in the growing DC sector, which is expected to expand significantly thanks to auto-enrolment.
Several of the largest DC providers, including Aviva, HSBC, Legal & General, Nest, The People’s Pension, and the Tesco Pension Fund have committed to work with the British Business Bank to explore options for investing in patient capital.
According to the Budget document these DC pension schemes are expected to have assets of more than £1 trillion by 2025. It says DC pensions schemes have a “vital role to play in long-term financing for UK growth and investment”.
Part of this consultation will see the Department of Work and Pensions look at whether the current charge cap restricts investments into such assets.
Aegon’s pensions director Steven Cameron says: “The Government clearly has its eye on the £1 trillion DC pensions market as a source of ‘patient capital’ investment to help innovative firms secure long term investment.”
He points out that patient capital investments offer the potential for high returns for those prepared to take a risk with newer, innovating companies. Pension schemes have the longer-term investment horizons that enable them to shoulder such risks.
But he adds: “People do change jobs and transfer their pensions, meaning schemes need to ensure they also have sufficient liquidity. Patient capital investments may not be priced daily which creates a challenge for schemes in which members can buy and sell units in investment funds daily.
“While an element of capital investment may be worth considering in some schemes, we’re pleased to see the Government recognise this must be part of a diversified approach. It must be left to trustees and scheme providers to consider, with no mandatory requirement. The key aim of pension schemes must remain providing an income in retirement to their members, not as a compulsory flow of investments to finance parts of our economy.”
Hymans Robertson head of DC consulting Mark Jaffray said: “The chancellor has quite rightly shone a spotlight today on improving access to finance for the UK’s innovative firms and infrastructure projects, including encouraging DC schemes to include them in their investment strategy.
“A move in this direction is welcome as it’s important that the barriers faced by DC schemes looking to invest in more illiquid assets, such as these, are reduced.
“Today’s low yield and low contribution environment means that schemes’ DC investment strategies need to work harder to generate the returns required.”