Pension consolidation for the nation | ET REALITY


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We all know that the UK’s (largely closed) private sector defined benefit schemes are heavy on bonds and light on stocks, for reasons. This makes some people very angry.

We also know that the United Kingdom has a private underinvestment problem and the government’s revealed preference for capital spending is year.

In the words of lin manuel miranda, maybe we can solve one problem with another and achieve a victory for the southerners. In other words: a quid pro quo.

Or, more prosaically, why not turn the East Croydon Pension Protection Fund into a public super fund that consolidates the 4,500 smaller private DB schemes to invest in productive assets across the UK?

The chancellor it’s curious on the reuse of the FPP. Think Tanks are enthusiastic. Even some investment consultants They are positive. The government just closed its ask for proof about the question. And you know who really In fact Love the idea of ​​making the PPF more than twice the size of the UK’s next largest pension fund? The FPP.

It’s not just because the FPP could manage (a lot!) more money. (There is little investment managers wouldn’t do for the opportunity to manage more money.) Having hired genuine in-house capacity across a variety of asset classes, costs per asset would likely fall, perhaps substantially. Additionally, more concentrated ownership could allow for greater management of holdings even if investment returns are not guaranteed to increase with fund size.

With almost all private sector defined benefit plans in massive surplus (pension funding positions increase when bond prices fall), and the PPF own financing position Hitting a monstrous 156 percent, there has arguably never been a better time to go the public consolidator route.

but there is at least two unanswered questions.

Firstly, what kind of change in the level of “productive assets” would actually result from consolidating the 4,500 smaller schemes and converting the £32.5bn PPF into a (globally significant) £232.5bn PPF?

The FPP he thinks he knows (with our emphasis):

Our strategic asset allocation effectively reflects that intended by the government.and shows what can be achieved by scaling up and taking a similar approach. As an example, if the 4,500 smaller schemes, representing around £200bn of assets, were consolidated in this way, this would suggest c. 30% (£60 billion) could be allocated to productive financial assets.

Thirty percent x £200 billion = £60 billion. There is no discussion there.

But his presentation reads as if consolidating small schemes into the PPF’s preferred asset allocation would generate £30bn more in “productive finance” assets. (In a Humpty Dumpty-type move, the DWP defined the term in the sense of social capital, infrastructure, private capital and illiquid assets).

Is this true? It is difficult for us to know exactly how this group of 4,500 plans is invested today. But the annual purple book of the plan data shows a couple of graphs indicating that the smaller the plan, the higher the allocation to stocks (especially UK) and the lower the allocation to bonds.

© Purple Book 2022

© Purple Book 2022

If we assume that the simple (rather than asset-weighted) average asset allocation of the universe of 5,131 private sector defined benefit plans is a reasonable approximation for the asset-weighted allocation of the smallest 4,500, we can compare this with the asset allocation of the FPP itself. .

You are viewing a snapshot of an interactive chart. This is most likely because you are not logged in or JavaScript is disabled in your browser.

To expand, click the control at the top labeled “Productive assets only.”

The FPP allocation to illiquids is higher than our indicator for the 4,500 small schemes. But the overall PPF allocation to Productive Assets (if we include listed stocks) is lower.

If small schemes were consolidated under the PPF asset allocation, it seems reasonable to expect that new illiquid investments would be financed by sales not of bonds, but of public shares. There is nothing necessarily wrong with this, but we were nevertheless surprised to see that the proposed public consolidation solution could consist of selling around £28 billion of shares (including £7 billion of UK shares), reducing holdings of “productive assets” at around £7 billion, and buying bonds.

So who would support an FPP super fund? That is a second, not insignificant, question that we will consider in the next post.

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