‘Ridiculous’: Torsten Bell under fire over pension schemes bill
London’s pension industry is in uproar over government proposals to keep what is known as ‘backstop power’ over the precise level of investment from funds in specific UK assets.
Torsten Bell, the pensions minister, has become the focus of anger at Whitehall’s attempts to exert a degree of control over where some of the biggest names in the City put their money.
The power set out in Labour’s pension schemes bill has been seen in the Square Mile as a Westminster power grab.
The proposal was shot down in the House of Lords after a fierce debate and now the government is seeking amendments to the legislation to keep the powers, which it sees as a key way of bringing a supply of fresh liquidity to stimulate London markets.
It comes amid concern that the London stock exchange has been struggling to keep up with global rivals, especially New York, despite record highs for the FTSE 100 before the outbreak of war in the Gulf.
But in the Lords debate which rejected the proposed mandate Baroness Stedman-Scott, a Conservative member, called it “dangerous and unjustified”, giving ministers “sweeping authority to mandate pension investments to whatever level they choose”.
Ministers will reportedly make concessions in a bid to push the power through the Lords. A new clause is expected to be written into the bill after the Easter break setting a limit on future use of the reserve power.
Baroness Ros Altmann, a cross-bench peer, asked: “Do the government really believe that they know better than the investment industry?”.
The fresh clause will say that ministers will not be able to force funds to invest more than 10 per cent of their assets in private markets, at least half of which will be invested in the UK.
As currently written, the bill has no cap. Instead, it reflects a voluntary target agreed in the industry-backed Mansion House Accord.
Despite the concession, the government remains determined to keep the backstop power to ensure UK funds honour promises to invest at home, but key London figures complain the bill fails to set out clearly how such rules will actually spur growth.
Where are the investment trusts?
Under the draft, investing in listed investment companies and trusts that hold private assets will not count toward firms meeting the legislation’s requirements.
It comes despite pension assets remaining the single largest institutional client for the UK investment management industry, accounting for 51 per cent according to the Investment Association.
Pension assets account for £2 trillion of the £3.8 trillion held by investment managers, while investment companies have injected over £110bn into private assets including areas critical for growth such as energy and infrastructure.
The exclusion has caused the Association of Investment Companies (AIC) to hit out at the bill, claiming that it would damage the industry, drive up costs and offer lower quality returns for savers.
Richard Stone, chief executive of the AIC, said: “We do not support compulsion, it should be left to independent trustees to make investment decisions on behalf of pensioners, not the government.
“Leaving that aside, if compelled to do so, it is ridiculous that the current Bill does not allow pension schemes to invest in investment trusts to meet their allocation to private assets.
“If they remain set on introducing these powers, we are urging the government to fix this Bill and make sure pension schemes have the option of using investment trusts to gain this exposure.
“Excluding investment trusts is a snub to the London market and ignores the proven benefits of the investment trust structure for private assets.”
Stone argued pension schemes would be able to benefit from “increased competition and choice” as well as being able to invest in portfolios which often trade at large discounts.
Others have voiced frustration at the inability to invest in UK-listed vehicles, such as trusts, despite the government ploughing forward with a power to invest in UK private assets, arguing that the bill instead favours unlisted private equity.
Confusion at the heart of government’s agenda
Others have expressed confusion in the need for the power at all, as the government used to be able to utilise venture capital trust (VCT) tax relief.
From 6 April this year, VCT income tax relief will be shrunk from 30 per cent to 20 per cent on investments up to £200,000 per tax year.
Meanwhile, the maximum gross assets allowed for a company to qualify for VCT funding will increase to £30m from £15m, and the annual investment limit for standard companies will double to £10m.
The government pushed forward these measures in a bid to encourage investment into larger, mature companies, despite chancellor Rachel Reeves’ desire to turn the UK into a global scale-up hub.
Industry figures have criticised the tax slash, citing that it offsets the backstop power in the pension schemes bill, damaging UK businesses and the private sector.
David Goodfellow, head of wealth planning at Canaccord Wealth, said: “While the government is trying to use pension schemes to facilitate and drive UK growth markets, at the same time, it implemented a measure in the November budget that will scupper growth for UK small businesses.
“The tax relief on VCT investing is being reduced…and there has been research to show many investors plan to reduce investing in VCTs post the end of the tax year.
“This means that a vital tap of investment for UK small businesses is being turned down considerably, there will be fewer funds to invest in this crucial sector.”
Choking economic growth
Away from the controversial backstop power which has spooked the sector, there are concerns around consolidation.
Goodfellow argues that while forced consolidation is usually a sensible strategy, it could “reduce competition and flexibility” and result in less diversity in investment approaches.
Lacking broad asset allocation puts pots at risk of potential underperformance, high fees and lower returns.
He said: “The size of the scheme doesn’t necessarily make it a better run scheme, and this will not be the best way forward for some pensioners.”
Others have expressed fears that the government has forgotten that “the purpose of a pension fund is not to fund national growth” but instead ensure suitable retirement funds.”
A spokesperson for the Treasury said: “The Mansion House Accord is an industry-led commitment by 17 major pension providers to…improve saver outcomes.
“We support this work because workers deserve their savings to work as hard for them as they worked to earn them. This industry wide change is taking place and we do not expect to use the reserve power, it’s only there as a backstop to give providers confidence the whole market will move together.”