UK biggest funds renew call for investment independence

The UK’s biggest pension funds have renewed calls for the government not to mandate investment decisions, warning the move would be “seriously damaging”.

The UK government is committed to maximising the benefits that pensions bring to members, the economy and wider society, as set out by the chancellor of exchequer, Rachel Reeves, through the government’s vision for pensions in her Mansion House speech in November 2024.

At the heart of this agenda is the drive for greater scale in both open defined benefit (DB) pension funds and the defined contribution (DC) sector.

Some of the key proposals include ensuring the greater and faster transition of assets into the Local Government Pension Scheme (LGPS) investment pools and encouraging consolidation amongst DC providers into a smaller number of master trusts with a minimum of £25bn of assets under management (AUM).

In addition, more recent proposals have set out the intention for the government to make surplus release from DB schemes easier.

In a report on the value of UK pension investments to the UK economy – published by WPI and commissioned by Brunel Pension Partnership, Border to Coast Pensions Partnership, Brightwell, Local Pensions Partnership Investments (LPPI), NEST, Railpen and Universities Superannuation Scheme (USS) – the funds have identified a number of key principles that should underpin an approach to realise the benefits of scale.

Firstly, the funds said that independence is “critical” to the effectiveness of large funds. They explained that the ability of schemes to make appropriate decisions on behalf of members is “critical” to the benefits of scale.

The report added that it would be “seriously damaging” if these decisions were outsourced to the government or the regulators.

The asset owners warned that mandating in any way could work against members’ interests, but also harm the economic value currently generated by large funds.

For instance, by artificially inflating the price of UK investments due to a limited pool of suitable opportunities, this could create volatility in the value of pensions due to overexposure to systemic economic risks and potential long-term underperformance of funds, the report explained.

Therefore, the funds said mandating an investment approach should be “categorically ruled out” to provide greater levels of certainty for trustees and savers.

The pension schemes have also stressed that members need to come first, explaining that the role of pensions is to provide an income in retirement, noting that it is not only understandable that large asset owners prioritise risk-adjusted returns for their members, but it is fundamental.

The report added that increasing investment in certain asset classes for the good of the economy cannot come at the expense of the secure retirement of pension scheme members.

Tess Page, UK wealth strategy leader and partner at Mercer, said that, provided there are good opportunities, mandation should not be necessary as pension funds will select the opportunities that meet their return and risk expectations.

She said: “Mandation creates some financial system risks, around forced buyers and the distortion this can create in the price of assets.

“This could jeopardise the financial wellbeing of UK pension savers who rely on strong returns for a comfortable retirement. If such investments fail to deliver, it could significantly erode trust in the pensions system.”

Page said that if the government can create a positive business environment, along with incentives that foster value creation and support a strong pipeline of investments, then mandation becomes “irrelevant”.

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