4 minute read
What is DC's role in the UK Growth Agenda?
by Julius Pursaill - Strategic Advisor NatWest Cushon
Should DC trustees be supporting the UK Growth agenda by investing in UK Growth assets (principally unlisted UK equities)?
The main pension providers, including NatWest Cushon, have signed up to the Mansion House Compact, committing themselves to a 5% allocation to private equity/venture, (a significant majority of which is presumed to be in the UK) by 2030.
The Government is clearly serious about understanding and removing any barriers to increasing pension fund assets into the UK Indeed, phase 1 of the pensions review is mostly focussed on this challenge.
So how should DC trustees respond to any consequent provider proposals?
For many trustees their starting point will be to observe that alignment with government policy does not fall within their fiduciary remit
They will point out the importance of geographic diversification. They might point out that the UK has been a relatively poor performer in recent years, justifying many trustees’ decision to move from a UK overweight towards a market cap allocation in listed equity.
They could even react with surprise that a provider could even contemplate the inevitable increase in costs that an allocation to private equity or venture would bring, given that price competition in the UK DC market is so fierce
Costs are a challenge. We need managers to find ways to accommodate fees far below the traditional 2 and 20, without sacrificing quality and ideally to do so within an open ended vehicle to allow allocations to be managed to a target SAA. Platform complications need to be resolved. We are optimistic that all this can be achieved.
But what might justify a UK overweight?
First, in a deglobalising world facing the prospect of tariff wars, domestic market growth stocks might reasonably be expected to suffer less than international market growth stocks. The neutral player also stands to lose least in a trade war. There is at least an opportunity for the UK to play a neutral role, positioned between the US and Europe, not least because of our limited economic exposure to manufacturing. The economic arguments in favour of geographic diversification are weaker than they have been.
At NatWest Cushon, we have a strong hypothesis that investment in UK unlisted assets can improve member outcomes beyond the impact of their investment returns. It’s easier to create emotional connections between members and UK success stories. Those emotional connections create “task persistence”, which in turn leads to better member decision making and thence better member outcomes.
Various stages of the hypotheses have strong empirical evidence to support them. Joining the dots remains a work in progress, but early data analysis supports the hypothesis.
Finally, it’s always seemed to me to be perverse that trustees should feel obliged to invest globally to secure an extra £1,000 in fund size at retirement, as opposed to investing in a way that creates societal assets in the country into which members are going to retire.
Members’ standards of living in retirement will depend materially on having access to a strong tax base, to green spaces, a well functioning health and long term care system, and on a society that has immunised itself against the worst impacts of climate change
It’s worth noting that local authority scheme trustees have long felt comfortable investing in social housing in their borough, knowing full well that their members are very likely to be in need of that housing in retirement. They have felt no obligation to diversify that social housing exposure internationally.
The case for an overweight to UK growth assets is strong.
