• Prime Minister Boris Johnson and Chancellor Rishi Sunak have written an open letter calling on UK pension schemes to spur a UK ‘investment big bang’ (A_Challenge_Letter_from_the_Prime_Minister_and_Chancellor_to_institutional_investors_FINAL__2_.pdf (publishing.service.gov.uk))
• Letter says over 80% of UK defined contribution (DC) assets are invested in listed securities, which represent around 20% of the UK’s assets
• Politicians chasing more investment in long-term, illiquid UK assets to boost economic recovery
• Investors should remain focused on picking low cost, diversified investments that fit with their goals and appetite for risk
Tom Selby, head of retirement policy at AJ Bell, comments: “Boris Johnson and Rishi Sunak are clearly banking on retirement investors to deliver an ‘investment big bang’ and power the UK economy back to health.
“Given their long-term focus and scale, defined benefit and automatic enrolment pension schemes might seem ideal candidates to support UK companies. There is also more than a whiff of patriotic fervour in this latest drive to ‘Build Back Better’.
“However, just because the PM and Chancellor click their fingers doesn’t mean pension investors will flock to illiquid UK investments in their droves.
“The reality is that pension scheme trustees have a duty to invest members’ hard-earned retirement pots sensibly, considering various factors including risk appetite, cost and, increasingly, impact on the environment.”
Diversification
“Institutional investors also need to prioritise diversification when choosing how to put members’ money to work, both in terms of the type of company they invest in and the country in which it resides. Ultimately, the main job of pension schemes is to invest in a way that maximises returns for their members, not in the way the Prime Minister tells them to.
“While the focus here is on institutional money, retail investors should also think very carefully before piling into illiquid UK assets.
“Such assets may offer growth opportunities but can come with extra risks. This was most famously demonstrated in the collapse of Woodford Investment Management, which backed illiquid start-up companies and ended up unable to sell them quick enough to get cash to investors.
“Of course illiquid investments can be perfectly appropriate, but should only be considered if they fit with your retirement goals and risk appetite.”
