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Depends on which pension funds, doesn’t it?

Jeremy Hunt’s plan to encourage pensions to invest more in Britain will leave savers worse off, the Government’s own modelling suggests.

The Chancellor unveiled a raft of pension reforms on Monday night in a speech to the City bosses, including a voluntary “compact” among the biggest pension funds to invest 5pc of their assets in start-ups and private equity.

If it’s DB then there are hardly any of those left so it doesn;t matter. If it’s DC then what in buggery is he thinking about?

11 thoughts on “Depends on which pension funds, doesn’t it?”

  1. Allowing pension funds to invest in startups seems reasonable (though risky). Forcing them, or in this instance coercing them into “voluntarily” doing so, is unwise.

  2. Cue every grifter in the country inventing a plausible (or even not very plausible) ‘tech start-up’ idea to sell to all the pension funds desperate to find investment opportunities to meet their 5% investment quota. Go long on Ferarris and villas in Marbella, and short on people’s actual pensions.

  3. DB pensions are still alive and well. The core government ones like Civil Service, NHS, and teachers are unfunded (they’ll be paid by future workers); but semi-public stuff like universities, local authorities, railways, TfL, and some public agencies, do have large pots of money invested in the stock market (they’ll be paid by future workers too). Nearly all of them are career-average rather than final salary schemes.

  4. Even the closed DBs still have a lot of funds, much of which should have been invested i yielding equities but is instead propping up the government’s own lending.

    Given the story of the last 25 years, since Gordon Brown’s vandalism, has been one of de-equitisation, why is that moron Hunt proposing to subsidise further private equity?

  5. My area of business (DB pensions) is getting a lot of attention at the moment. Even we are bemused by this. Schemes in surplus don’t want to risk that surplus as they’d like to dump the liabilities on insurance firms like mine. Schemes not in surplus shouldn’t really be making big bets. That leaves?

    And some schemes already have some ‘interesting’ assets. Carbon offsets? Forests? Hugely illiquid investment funds? Yep. And now they want some advisors to go and advise trustees to invest in who knows what!

    A contact of mine was pictured signing up to this with the chancellor. People signing are doing it for whose benefit?

  6. why is that moron Hunt proposing to subsidise further private equity?

    A decade of interest rates at 5%+ will shaft the PE model, so the industry’s ‘geniuses’ need another means of government support.

  7. @ Andrew Again
    History (including the performance of Scottish Mortgage) shows that returns on Private Equity have *generally* been higher than on quoted investments. Investment Theory 001 (not even 101) explains that the illiquidity and higher perceived risk of private equity will leadto investors demanding a higher *expected* rate of return on private equity than on quoted equity. All other things being equal (yeah, I know, but …) this will result in the actual returns being *on average* higher.
    One needs, of course/however, to avoid being sucked in at the top of a relative performance peak caused by private equity (or whatever else) being the current investment fashion.
    If it’s up to 5% over a period of years, that’s not a dangerous “big bet” -if it was at least 5%
    in a year that would be bloody stupid as there are not enough decent prospect at any one given time to mop up 5% of DB pension fund assets.

  8. You could say that DB is one of my areas of expertise too.
    I think AndrewAgain has a point but…it depends how you measure surplus. Let me just say that USS, the universities DB scheme just lost at least 25% of its assets value and yet moved from being in significant deficit to being in significant surplus. This results from the currently f*ing stupid valuation methods used by pensions actuaries and enforced by the Pensions Regulator.
    I can’t say too much more without outing myself but it’s not clever.

  9. As Johnny says, fashion can dictate the price at which you buy in, but also the price you sell at. So PE assets will be expected to perform better over the long term but come the day you need to pay a pension their value might be a tad less than required.

    What Clovis says … that’s why the surplus measure is a tad bizarre. Insurance liabilities are measured on cashflow matching, after adjustments for expected losses and then topped up with capital.
    Pensions in payment are best cashflow matched. Most DB pensions are in payment. Those not in payment are still known liabilities so if you’ve a surplus invest the proceeds in matched assets to reduce the risk. So that leaves schemes in deficit, even at current interest rates.

    PS My DC pension funds are about 85% in equities having bought into some Gilts in the last week. But I’ve also a few DB pensions, so I’ve got my base requirements met so I can take risk. I’m not in deficit….

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