Regulators move to shake up UK pension funds​

By Jake Rickman

What do you need to know this week?

Nausicaa Delfas, the newly appointed CEO of The Pensions Regulator (TPR), has announced that pension trustees must start considering how to diversify pension investments.

Specifically, pension schemes are under pressure to invest in more public equities, as well as alternative asset classes like private equity, startups, and real estate. Implicit in this directive is that pension trustees unable or unwilling to do so will need to consolidate or wind up their schemes and transfer them to more capable pension managers that will.

TPR is the government regulator that oversees workplace pensions. While it sits under the Department for Work and Pensions (DWP), it works closely with the Financial Conduct Authority (FCA), which is one of two principal financial regulators. This reflects the fact that pension funds are one of the largest sources of capital invested in the UK financial markets.

Delfas’s announcement comes off the back of the so-called Mansion House reforms announced by Jeremy Hunt, Chancellor of the Exchequer, a couple of weeks back, which contain similar objectives.

Why is this important for your interviews?

Pension reform has been a buzzing topic for some time now. Successive Tory governments and certain policy-makers and think-tanks have viewed pensions as an untapped source of capital, which, if tapped, might make the UK’s markets more competitive on the global stage.

In effect, critics of the current pension management culture believe that many pension managers are too conservative with pension investment strategies. Specifically, compared to other global pension investment markets, UK pension funds over-invest in corporate and government bonds and under-invest in UK and non-UK public equities markets, as well as alternative asset classes including private equity. Consequently, there is less capital available to early-stage and growth companies in the UK compared to other countries.

Ministers have tried for some time now to encourage pension managers to invest in other asset classes to little effect. The proportion of low-risk/low-return assets like bonds that make up pension assets has increased over the past ten years, according to the Financial Times.

It now seems that Hunt is taking a more active role in coercing funds to embrace these reforms. We should also view these reforms in the context of other objectives that Hunt has expressed support for, including creating a super-pension fund similar to other countries like Canada and Australia.

If these reforms prove successful, there would be more capital available to invest in higher-return markets like private equity and venture capital. It follows that pension savers’ funds will proportionally increase, while also giving private companies access to more capital.

However, certain critics fear that the fact that these alternative asset classes are riskier means that retirement savers may incur undue risk, which could reduce the value of their savings. There are also concerns that pension funds investing in more illiquid asset classes like private equity may incur higher management fees, which may erode any gains.

How is this topic relevant to law firms?

Pensions is a practice group in its own right, with law firms like Travers Smith, Linklaters, and CMS widely considered to be first-rate.

However, the potential impact on the wider financial market means that these reforms could touch on law firm practice groups as diverse as financial regulation (contentious and non-), equity capital markets, private funds, and private equity.