Pension Funds: Use of UK-listed Investment Companies

Question

Asked by

My Lords, the Government recognise the considerable value that UK-listed investment companies bring to the UK, making up 30% of the FTSE 250 and providing crucial funding to high-growth sectors. The Government have not undertaken a specific assessment of the use of UK-listed investment companies by pension funds. However, in November 2024, we published a general analysis of the trends of UK pension fund investment.

I thank the Minister for that Answer. As he says, UK-listed investment companies are a world-leading, well-established route to investing in illiquid assets such as infrastructure, real estate, energy and life sciences—the very investments that the Government are seeking defined contribution pension investors to invest in to boost British growth. For defined contribution pension funds especially, closed-ended investment companies, which have expert management and offer diversification and daily pricing, seem an ideal way to gain exposure. Can the Minister help me understand, or perhaps write to me to explain, why the Pension Schemes Bill, at page 41 line 26, explicitly rules out using listed closed-ended investment companies to fulfil the Mansion House intent if mandation is required? Will he meet with me and other interested Peers to discuss this apparent error and how to amend or correct it in the Bill?

I am grateful to the noble Baroness for her question. I take this opportunity to pay tribute to her expertise and the consistency of her campaigning in this area. I fully understand the points that she is raising and recognise the important role that investment companies play in providing access to private markets. She talked about the recent Mansion House accord. I hope she agrees that the industry is moving in the right direction in diversifying its investments in the Mansion House accord, with 17 of the largest workplace pension providers having voluntarily committed to investing at least 10% of their defined contribution main default funds in private markets by 2030, with at least half of that invested in UK private assets.

I understand the noble Baroness’s concern about the scope of the proposed reserve power in the Bill. The approach that we have taken quite deliberately is to ensure that the powers are suitably targeted and contain guard-rails. They are not intended to be open-ended but should be capable of serving as a backstop to the commitments that pension providers themselves have made through the Mansion House accord and will be used only if we consider that the industry has not made sufficient progress on its own. None the less, I am grateful to the noble Baroness for her constructive engagement on this issue and happy to continue to discuss it with her. As we take the Bill through Parliament, her representations and those of the wider sector will be considered alongside our broader policy objectives. Our aim remains to ensure that the reserve power is effective and proportionate, and delivers for pension savers and for the UK economy.

I express my support for my noble friend on the points made by the noble Baroness. There is an issue here that needs to be resolved. There is also a broader issue that I ask my noble friend to respond on: the use of private equity funds in pension schemes. To put it mildly, private equity has a mixed record. A blanket approval for the involvement of private equity in providing pensions has all the makings of a forthcoming disaster.

I am grateful to my noble friend for his thoughts on that matter. I do not necessarily agree with him about private equity’s role in pension funds. It has an extremely important role in investing in the infrastructure and fast-growing companies that we want to see so that the UK economy can unlock that kind of investment. As for its inclusion in the Mansion House accord, he will be aware that this is an industry agreement and that the Government are not participants in it.

My Lords, I speak in support of the noble Baroness, Lady Altmann, on this issue. On the face of it, it looks as though the Bill is embodying discrimination against listed investment companies because they focus very much on smaller infrastructure projects—it is one of their appeals to many investors, particularly to local authorities. The language favours long-term asset funds, which focus on megaprojects and are typically owned by the large megacompanies in the pension industry which benefit from the fees that are generated. Is this not a case where the industry is persuading the Government to discriminate in favour of a route that it sees as more profitable for itself and not necessarily as the right route for the country?

I am grateful to the noble Baroness and pay tribute to her for her expertise in this matter and her continued campaigning. As I have said before, the Mansion House accord is an industry-led agreement. The Government are not participants in it. The proposed backstop powers in the legislation that she refers to are not intended to be open-ended but are designed to be capable of being a backstop to the commitments that pension companies themselves have made through the Mansion House accord. It makes sense for those powers to align with the commitments that have been included by the companies and the industry itself. Nevertheless, as I have said already, I am grateful for constructive engagement on this issue. As we take the Bill through Parliament, representations like the ones the noble Baroness has just made, and those of the wider sector, will be considered alongside our broader policy objectives.

My Lords, we the Official Opposition understand the attraction of strengthening the economy and strengthening pension funds by investment in infrastructure. However, the Pensions Management Institute said last week that it believes the reserve—that is the mandation power in the Pension Schemes Bill—sets a “dangerous precedent” for political interference with trustees’ fiduciary duties. It warned that the Government’s proposals would deliver poor outcomes for savers. Does this not concern the Minister?

I am grateful to the noble Baroness for her question and her broad support for the Government’s agenda. This is an area where, aside from the specific issue that she raises in her question, we are in agreement that we want to see greater investment in UK infrastructure in this way. I do not agree with the specific point about savers. The measures contained within the Bill will see far greater returns for savers. That is incredibly important and lies behind a lot of the measures that we are taking.

On the specific reserve power, obviously we are very encouraged by the Mansion House accord. It builds on the existing Mansion House compact, set up by the previous Chancellor in the previous Government. In the light of this progress, the pensions review concluded it was not necessary currently to mandate investment. Instead, the Bill includes a reserve power, which will, only if necessary, enable the Government to set quantitative baseline targets for pension schemes to invest in a broader range of assets, including in the UK, for the benefit of savers and for the benefit of the economy. The Government do not anticipate exercising the power unless they consider that the industry has not delivered the necessary change on its own.

My Lords, can the Minister clarify for me, and no doubt others, to what extent the independent trustees of pension funds, when giving a mandate to investment managers, are able to forbid that manager to invest in certain areas, whether it be private equity, defence shares or whatever?

I am afraid I do not know the specific answer to the noble Lord’s question. I will happily write to him to clarify.

If the Government are serious about growth, they need to encourage investment in private assets. When applying what many of us regard as retrospective inheritance tax to private defined contribution pension funds, HMRC has specifically excluded the opportunity to apply business property relief to assets. Given the exclusion of investment trusts in the pension Bill, which is regrettable, how are HM Government going to actively encourage and facilitate people to invest in private companies?

Our entire agenda is built around encouraging exactly what the noble Lord states. He mentioned inheritance tax. I want to clarify that pensions, and the considerable tax reliefs on them, are designed to provide income for retirement, rather than acting as a tax-planning vehicle for transferring wealth free of inheritance tax. That is an important principle to maintain. Equally, he asks how we are going to encourage investment in private assets. That is exactly what these reforms are designed to do.