Key Takeaways
- • The UK Pension Schemes Bill, now law, has been revised to make the productive finance framework wrapper-agnostic, so listed closed-ended investment companies and REITs now qualify for pension investment based on the quality of their underlying assets such as infrastructure.
- • The revision reverses earlier drafting that excluded investment trusts from pension portfolios, despite British Business Bank and Oliver Wyman reporting investment companies as having "high" suitability for pension investment.
- • Investment trusts offer permanent capital and daily liquidity, contrasting with LTAFs that can be forced to sell private holdings to meet redemptions during volatile markets.
- • The author, David Harris of Cadarn Capital, argues the benefit is likely to be more nuanced: the government does not intend to use the productive finance mandate unless industry fails to act, and DC mandate limits are capped at 10% of default fund assets with no more than 5% in UK assets.
- • Trustees may favour in-house vehicles, LTAFs and co-investment platforms over trusts, and the sector must demonstrate performance and cost competitiveness.
Summary
The UK Pension Schemes Bill, now law, is expected to influence how billions of pound of pension assets are deployed across the UK economy. A central change is the government's intention to reshape the productive finance investment framework to be wrapper agnostic. This moves away from earlier drafting that, in effect, shut listed closed-ended investment companies out of pension portfolios, a development that has been welcomed as a step forward for the investment company sector.
The earlier draft prevented pension schemes from using listed closed-ended investment companies to access private assets, including venture and growth capital. According to the article, that decision was made despite the British Business Bank and Oliver Wyman both rating investment companies as having "high" suitability for pension fund investment. The Association of Investment Companies argued the decision reflected the preferences of large pension scheme signatories of the Mansion House Accord rather than evidence, and such schemes often favour captive vehicles such as long-term asset funds (LTAFs).
After intensive lobbying and several House of Lords amendments, parliament adopted a compromise. The revised framework includes closed-ended investment companies and real estate investment trusts (Reits), which now qualify based on their ability to provide exposure to productive finance such as infrastructure. The focus has shifted to the quality and nature of underlying assets rather than the holding structure.
David Harris, managing director at Cadarn Capital, argues the structural case is strong: permanent capital funds businesses and infrastructure without forced sales to meet redemptions, whereas LTAFs may have to sell private holdings at points of peak volatility, potentially diminishing portfolio quality for remaining investors. He suggests that listed trusts, offering daily liquidity, could help pension schemes manage liquidity risk in times of market stress.
Harris cautions that the benefit may be overstated. The government has repeatedly said it does not intend to use the productive finance mandate, a reserve power, unless the pension industry fails to embrace the initiative. The Conservative Party and the Bank of England governor have raised concerns that mandated investment could interfere with trustees' duty to members and distort markets. For DC schemes, the mandate is limited to 10% of default fund assets, with no more than 5% in UK-based assets. Trusts would need to capture a meaningful share of this constrained allocation while competing with LTAFs, in-house vehicles and direct co-investment platforms, and many may struggle to offer the liquidity needed for material deployments.
The bill aims to accelerate consolidation of smaller pension schemes into larger funds able to invest in long-term assets. Harris concludes that investment companies are now among the available options, but success depends on the sector's ability to make its case, demonstrate performance and compete on cost. He describes the wrapper-agnostic stance as significant but not a guarantee of success.
The earlier draft prevented pension schemes from using listed closed-ended investment companies to access private assets, including venture and growth capital. According to the article, that decision was made despite the British Business Bank and Oliver Wyman both rating investment companies as having "high" suitability for pension fund investment. The Association of Investment Companies argued the decision reflected the preferences of large pension scheme signatories of the Mansion House Accord rather than evidence, and such schemes often favour captive vehicles such as long-term asset funds (LTAFs).
After intensive lobbying and several House of Lords amendments, parliament adopted a compromise. The revised framework includes closed-ended investment companies and real estate investment trusts (Reits), which now qualify based on their ability to provide exposure to productive finance such as infrastructure. The focus has shifted to the quality and nature of underlying assets rather than the holding structure.
David Harris, managing director at Cadarn Capital, argues the structural case is strong: permanent capital funds businesses and infrastructure without forced sales to meet redemptions, whereas LTAFs may have to sell private holdings at points of peak volatility, potentially diminishing portfolio quality for remaining investors. He suggests that listed trusts, offering daily liquidity, could help pension schemes manage liquidity risk in times of market stress.
Harris cautions that the benefit may be overstated. The government has repeatedly said it does not intend to use the productive finance mandate, a reserve power, unless the pension industry fails to embrace the initiative. The Conservative Party and the Bank of England governor have raised concerns that mandated investment could interfere with trustees' duty to members and distort markets. For DC schemes, the mandate is limited to 10% of default fund assets, with no more than 5% in UK-based assets. Trusts would need to capture a meaningful share of this constrained allocation while competing with LTAFs, in-house vehicles and direct co-investment platforms, and many may struggle to offer the liquidity needed for material deployments.
The bill aims to accelerate consolidation of smaller pension schemes into larger funds able to invest in long-term assets. Harris concludes that investment companies are now among the available options, but success depends on the sector's ability to make its case, demonstrate performance and compete on cost. He describes the wrapper-agnostic stance as significant but not a guarantee of success.
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