The UK government is calling on pension funds to invest more in companies that need money to grow. In an open letter, Prime Minister Boris Johnson and Chancellor Rishi Sunak asked big institutional investors to consider investing in long-term assets such as unlisted companies to help kick start the economy following the pandemic.
Here is the lowdown.
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What did the government say on pension funds?
Johnson and Sunak sent an open letter to the UK investment industry that called for an “investment big bang”. This say this would ‘unlock the hundreds of billions of pounds sitting in UK institutional investors’ and help fuel the country’s economic recovery from Covid.
The two pointed out that global investors, including pension funds from countries such as Australia and Canada, are benefiting from opportunities in UK long-term investments.
There is, however, a severe under-representation of UK institutional investors when it comes to owning UK assets. For example, local pension funds currently hold billions of pounds for their members. However, more than 80% of their investments are in listed securities. But these only make up 20% of the UK assets.
“While we are glad that international investors prize UK assets and are working hard to attract even more inward investment, we also want to see UK pension savers benefitting from the fruits of UK ingenuity and enterprise, being given the opportunity to back British success stories, and secure higher returns and better retirements,” they said.
Industry stakeholders have welcomed Johnson and Sunak’s call.
For example, Peter Glancy, of Policy at Scottish Widows, said:
“The government is right to look to the power of pensions to help Britain recover following the pandemic. Trillions of pounds are invested in UK pensions, which could make the difference as the country sets its sights on a return to prosperity. UK savers will benefit too, as the returns on these long term investments hold the potential to give a much-needed boost to retirement pots.”
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How do pension funds stand to benefit by investing unlisted companies?
Johnson and Sunak say that investing in more long-term UK assets could give pension savers access to better returns. It could also enable them to “to see their funds support an innovative, healthier, greener future for their country”.
Even though there are no guarantees when it comes to investing, investors stand to make high gains by putting money in illiquid assets like start-ups or unlisted companies.
These investments, however, can be hard to sell in the short term. They require a long-term approach to reap benefits.
Fortunately, this fits right into the way pension funds operate. Pension funds do not allow their members to take out cash at any time. In fact, you can’t start drawing from most pensions until at least you are 55.
That means there is less risk of a withdrawal surge – the kind of surge that could destabilise a fund or lead to its collapse.
Is the government doing anything to help?
Johnson and Sunak acknowledge that the government has a duty to remove barriers and costs to making long-term illiquid investments.
But they say that the government is doing everything possible to foster a change in institutional investors’ mindset and behaviour. The government remains open to addressing any further barriers whenever they are identified. Johnson and Sunak said that the ministers would provide more info about their plans in the next few weeks.
Glancy comments that it’s promising to see the government acknowledge the obstacles that currently prevent long-term illiquid investment. “We hope this talk turns to action and the government’s call for an investment big bang does not end in a whimper”, he stated.
