The UK Government won its fight to get its Pensions Bill through Parliament last night. However, the House of Lords extracted a number of concessions, which included allowing pension funds to use investment companies as a way of getting access to private assets.

You may remember that I wrote about this in March. The main row was about the Government’s demand that at some future time, it could mandate how pension funds invest their assets (it wanted to be able to say that at least 10% was put into private assets and at least half of that in private assets in the UK). Treasury Minister Torsten Bell has now said that this power will be capped, time-limited, and pension funds will be able to object if they feel that the way that they are being asked to invest is not in members’ best interests.

Baroness Sharon Bowles, who readers may remember wading into battle on investment companies’ behalf in the cost disclosure fight, described this as a decent compromise.

Here is an extract from Torsten Bell’s speech, with the crucial part referrring to investment companies highlighted:

“We are also bringing forward a final set of changes that aim to do justice to the points made in this House and the other place, while retaining the original policy intent. They have three elements. First, there is a new requirement on regulators – in this case, the Pensions Regulator and the Financial Conduct Authority – to make an assessment of barriers to the delivery of private asset investment, including the extent to which those barriers reflect the collective action problem, which we have discussed extensively in our exchanges on the Bill. That assessment would be required to be incorporated into the ex-ante report that the Secretary of State must produce before any use of the reserve power that the Bill provides for.

“Importantly, our amendments also place on the Government a duty to have regard to this regulatory assessment before any use of the power. That will ensure that a Secretary of State behaving reasonably – as they are required to do – must place weight on the assessment of the regulators on this matter. It was always the Government’s intention to evaluate progress against the Mansion House accord commitments in terms of the broad direction of travel over a substantial period of time, rather than looking at short-term movements in private asset exposure. To reinforce that, we propose to add to the Bill that the power cannot be exercised any earlier than 2028.

“Our second set of changes builds on the savers’ interest test to reinforce the central role of trustees and providers. Our amendments in lieu would change the bar required to engage the savers’ interest test. Rather than having to demonstrate that meeting the asset allocation requirements would be likely to cause material financial detriment, a scheme would instead have to show that meeting the requirements is “likely not to be in the best interests of members”.

“That reflects language regularly used when considering trustees’ duties. In addition, we have more tightly specified the regulators’ role, confining it to ensuring that the trustee or provider’s own assessment of what is in the best interests of members is “reasonable”, rather than replacing that assessment with their own.

“Thirdly, our amendments address worries about the differential treatment of particular investment vehicles by allowing for consideration of direct or indirect holdings in the six asset classes named in the Mansion House accord.”

Victory for common sense

Ben Conway, head of fund management at Hawksmoor Investment Management, said: “While the headline-grabber is the much lighter mandation powers, the big news for the investment company community is that investments in private assets via investment companies will count towards any potentially mandated target allocation (you had to really listen closely to Tortsen Bell MP’s statement to catch it!).”

Richard Stone, chief executive of the Association of Investment Companies (AIC), declared: “Common sense has prevailed!

“This means, if at some time government mandates schemes to invest in target assets such as infrastructure and private equity, schemes will be able to use investment companies to invest in those assets. This has to be right as the investment company structure is the only one proven to be suitable for investing in such assets.”

He added: “Importantly, as they push towards meeting the voluntary Mansion House Accord and Compact commitments, schemes can now invest with confidence in investment companies. They will no longer fear that at some future date those investments might not count towards their target allocation.”

Christian Pittard, head of closed‑end funds at Aberdeen Investments, said: ““Investment trusts already play a vital role in financing infrastructure, digital connectivity, clean energy and the logistics backbone that underpins the wider economy. A framework that is focused on assets rather than structure will make it easier for pension schemes to deploy capital more effectively and at scale.”

William MacLeod, managing director at fund manager Gravis, praised Baroness Bowles and Baroness Altmann for their role in the debate; “they have held the line, kept the debate focused, mustered both defence and attack when necessary and ultimately led the Opposition to victory in both the Lords and amongst MPs in the Commons, specifically, Helen Whately and Katie Lam MP.”

Whately, Conservative shadow secretary of state for Work and Pensions, said: “After months of opposition, mandation, as it now stands, is a shadow of its former self. But it is still wrong in principle and Conservatives would repeal it entirely.”

Our view

QuotedData’s James Carthew said “This could be very good news for the sector and our thanks goes to everyone that was campaigning on the industry’s behalf. With the clarity provided by the Bill that investments in private assets through investment companies are permitted, why would a pension scheme invest in assets at asset value when it can secure a higher return for members by buying them at a discount?”

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