The private equity industry must change the way it operates if it is to attract pension fund assets, the UK’s Minister for Pensions Torsten Bell has said.
Addressing delegates at the Pensions and Lifetime Savings Association (PLSA) investment conference in Edinburgh, Bell said there is huge opportunity for private markets to secure investment from consolidated defined contribution (DC) schemes, but only if they consider costs.
“There’s a question for [the private equity] industry about its future and what it wants in terms of scale versus costs. Scale is a big opportunity for the industry, but it does have to change how it operates to maximise that.”
Bell made clear that the government would be moving towards greater consolidation of the UK’s DC schemes to ensure better economies of scale which will facilitate more meaningful investment in domestic private markets.
“We want fewer, bigger, better pension schemes. Larger schemes are better placed to invest in more productive asset classes, and this is a diversification as important as that of geography, which rightly gets so much attention. Scale also helps to reduce costs and it increases bargaining power, both can help provide the headroom for building investment capability or just better returns for members around the world,” he said.
Bell also reiterated earlier comments made by Chancellor of the Exchequer Rachel Reeves who says UK pension funds underinvest domestically, compared to their international peers.
“Why do I focus on enabling productive investment? Because we do so little of it [domestically]. UK DC pension funds allocate 3 per cent to infrastructure and 0.5 per cent to private equity. That compares to the 11 per cent infrastructure allocation in Canada and 5 per cent to private equity in Australia. And every percentage point or part of a percentage point matters when this investment can deliver not only returns for members, but also contribute to economic growth.”
Bell added that that boosting returns and delivering value for money will be at the heart of a swathe of government reforms planned for the UK retirement industry.
Bell said: “My big argument is that we need to pay more attention to returns for savers, rather than just focus on costs or savings rates. Important as both of those are, celebrating the success of auto enrolment can no longer be a substitute for answering the harder question: what does the best landscape for those savings to be managed in look like both to maximise returns for savers and to ensure those savers live in a country that is investing and growing again after a long decade of economic stagnation.”
Ped Phrompechrut, Chief Investment Officer at Future Growth Capital – a recent joint venture between Pheonix Group and Schroders offering access to private markets to pension schemes – welcomes the Minister’s views, arguing DC schemes need greater levels of diversification, especially in the growth phase.
“What does the growth phase in DC look like? It looks like a lot of global equities and it looks like it needs diversification, because we are all worried about the same things, which is concentration within the US market and the narratives and the geopolitics, and not wanting to wake up to see the portfolio is down 4 or 5 per cent in a single day, because a single individual’s decision.”
Phrompechrut continues: “That is where the UK play a role in offering an attractive set of private market assets.”
