The Spring Budget unveiled by the Chancellor of the Exchequer Jeremy Hunt yesterday, failed to fulfill a political knock-out blow, but did reveal a number of initiatives that could shape investment going forward.
The first was on defined contribution (DC) schemes to publicly compare performance. Philip Smith, DC director at TPT Retirement Solutions, welcomed the move. “The chancellor’s plans to require DC schemes to publicly compare performance data against competitors will pull back the curtain on pensions,” he said.
“Members and employers will be given much greater transparency on how their scheme is performing against others in the market,” Smith added. “It is important that this comparison looks at the value for money that schemes provide, considering investment performance as well as fees.”
The chancellor also put forward an initiative on publishing how much schemes invest in the UK. But Philip Smith identified a potential conflict. “There is a risk the government’s policy to force schemes to publish how much they invest in the UK will conflict with its policy to compare scheme investment performance,” he said.
Smith then added: “While many trustees will be open to investing more in the UK, we expect they will still prioritise the investment performance, in line with their fiduciary duty.”
“However, even if schemes do increase investment into UK equities, it may not provide the boost to the economy that the chancellor hopes,” added Smith. “Many large UK-listed companies such as those in the oil and gas or mining sectors, earn significant amounts of revenue from business overseas.”
Forcing disclosure
James Alexander, CEO of The UK Sustainable Investment and Finance Association (UKSIF) was critical of the chancellor’s approach.
“Forcing pension funds to disclose rates of UK investment or increasing the ISA allowance for investment in British firms, fail to resolve the policy barriers driving private capital abroad, particularly in sustainable industries, which are our biggest source of future growth,” said Alexander.
“Our members are clear that the answer to unlocking billions more in private investment, lies in demonstrating policy certainty and ensuring the UK has high-quality investable projects with long-term growth potential,” he added.
And Richard Parkin, head of retirement at BNY Mellon Investment Management, said while he welcomed the chancellor’s announcement on encouraging greater UK investment, he believed the “chancellor could have gone further.”
Putting the whole equity investment position in perspective, Parkin noted that UK pension funds started reducing their UK equity exposure over 25 years ago whittling down their UK holdings from 70 to 80% of equity assets to negligible holdings today.
Indeed, many pension schemes’ equity holdings now track global stock market indices where the UK represents a paltry 4%, he said. “When we look around the world, we find comparable countries such as Australia and Canada still have a strong domestic equity bias despite relatively small stock markets,” Parkin said.
Therefore, Parkin said that the chancellor’s announcement requiring schemes to disclose their UK equity allocation will do nothing more than “confirm what we already know”, that pension funds generally have no bias to the UK.
Direct action
“More direct action will be needed to bring about any real change and drive greater UK investment,” added Parkin. “Of course, governments dictating investment policy introduces a myriad of issues, but given the cost of pension tax reliefs to the UK exchequer many would argue that UK plc should see a larger share of these investments.”
Tim Middleton, director of policy and external affairs, at the Pensions Management Institute, though expressed concern that this could lead to coercion in where pension funds invest.
“Whilst we remain supportive of initiatives that will increase investment by pension schemes in the UK economy, we are concerned at the implied suggestion that this would involve some form of coercion,” he said. “We believe that trustees should retain absolute control of their investment policy and would like to see clarification of exactly what the Chancellor is proposing.”
In what could be said to be much needed support for the UK equity market, the chancellor announced the launce of a British ISA, the so-called BRISA. Natalie Bell, fund manager within the Liontrust Economic Advantage Team, said this was a welcome move.
“We believe the BRISA will be an important catalyst to help reverse the trend of persistent outflows experienced by UK equity markets for a number of years. It sends a vital message that the government stands ready to back British companies, directing a proportion of taxpayer-subsidised investment towards improving employment, growth and productivity here in the UK,” she said.
Savings erosion
On other budget announcements, Susan Waites, partner at Hymans Robertson, noted there could be a negative knock-on effect surrounding the widely trailed 2% reduction in employee National Insurance Contributions (NICs) announced in the budget, which will provide a welcome boost to take home pay from April.
“It does however further erode the savings an employee makes by sacrificing pay for pension contributions, which cuts across government intentions and industry efforts to incentivise employees to pay much more into their workplace pensions,” said Waites.
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