The UK’s planned entry into the sovereign green bond market faces hurdles to convince investors of its viability, according to a consultant.
Last week, the government announced plans to issue £15bn (€17.5bn) in green Gilts through two auctions later this year.
Laura Myers, head of defined contribution (DC) at LCP, said: “This is a significant step forward and it’s fantastic that the government has listened to the demands of the Pensions and Lifetime Savings Association [PLSA] and big pension schemes.”
Speaking on a panel debate at the PLSA’s virtual investment conference today, she warned that the next steps the government takes will be important in predicting the success of the new assets.
“We need to make sure this is not a PR or ‘greenwashing’ exercise,” Myers said. “We need clear and robust commitments… My concern is that the government doesn’t have enough policies in place to meet those green commitments.”
The consultant added that the pricing of the green bonds would also be important. The planned green Gilts will make up roughly 5% of the planned £296bn of UK government bonds scheduled to be issued this year, so demand was “likely to be high”, Myers said.
“Will investors be willing to accept lower yields?” she queried.
The panel discussion centred on the pension industry aspects of UK chancellor Rishi Sunak’s annual budget announcement, which took place last week. Aside from the green Gilt issuance, panellists also debated the freezing of the lifetime allowance (LTA) for pension savings and the Department for Work and Pensions’ (DWP) proposed review of the charge cap for auto-enrolment pension funds.
Call for charge cap change
Currently set at 75 basis points, the DWP wants to look at how to accommodate the inclusion of illiquid assets such as infrastructure and venture capital into DC funds.
Emma Douglas, chair of the PLSA’s policy board and head of DC at Legal & General Investment Management, indicated that there would not be an easy solution to the issue.
“We estimate that adding a 5% allocation to venture capital in a DC default fund would cost 15bps,” she said, “effectively doubling the investment costs. No one wants to double their costs for the sake of 5%.”
For that reason, the consultation was focused more on achieving the best outcomes for members rather than just fees, Douglas explained.
LCP’s Myers added that the pensions and investment sectors also needed to address an “obsession with daily dealing” and called for “more innovation from managers and providers”.
Pensions tax needs long-term solution
On the LTA freeze, Carol Young, HR director for reward and employment at NatWest Group, said Sunak’s decision to freeze the allowance at £1,073,100 for 2020-21 was “the least worst option”.
However, she said the pensions sector needed a long-term sustainable solution for the broader issue of pensions taxation as “constant tinkering definitely does not help with building confidence” in retirement saving.
Young – who also chairs the PLSA’s defined benefit (DB) policy committee – pointed out that the UK’s allowance system can affect DC and DB savers differently.
The LTA limits how much an individual can save in total for their retirement. While DB savers have foresight over how much their benefits are worth, DC savers do not and can inadvertently breach the LTA through investment returns.
The annual allowance limits how much a saver can put into their pension every year and is currently set at £40,000 for the 2020-21 tax year. NatWest’s Young said DB savers were more likely to be caught by this as contribution levels tended to be higher in these schemes.
“We need to look at allowances in a different way and think about whether the same rule should apply to DC and DB schemes,” she said.