- Government calls on institutional investors to boost the UK’s long-term growth
- GMP equalisation group issues supplemental guidance on transfer payments
Government calls on institutional investors to boost the UK’s long-term growth
The Prime Minister, Boris Johnson, and Chancellor of the Exchequer, Rishi Sunak, have challenged the UK’s institutional investors – and specifically trustees and managers of DB and DC pension funds – to ignite an “Investment Big Bang” by investing a greater proportion of their capital in long-term UK assets.
In an open letter to industry, the Government highlights the “rich pool of assets ripe for long-term investment” available in the UK economy and draws out the fact that while UK institutional investors are under-represented in owning UK assets, global investors – including overseas pension funds – are benefitting from the opportunities these assets afford.
Having set this context, the letter goes on to discuss the Government’s plans to “Build Back Better” and suggests that this investment by UK institutional investors is needed to drive the UK’s recovery. The letter specifically challenges trustees and managers of DC or DB pension funds and those running insurance companies or advising investors on their investment strategy to “begin to invest more in long-term UK assets, giving pension savers access to better returns and enabling them to see their funds support an innovative, healthier, greener future for their country”, while acknowledging that the change in investor mindset needed to do this will not happen overnight.
Alongside this call for engagement, the letter does recognise the need for the Government to remove obstacles to making long-term illiquid investments in the UK and notes some of the measures already agreed, including the new Infrastructure Bank, the forthcoming reform to the cap on fees in DC funds, acceleration of pension consolidation options and the UK’s first Green Gilt, due to be issued in September.
In a related move, it has been reported that the Pensions Regulator will not now go ahead with its proposal to cap investment in unregulated assets to no more than a fifth of a pension scheme’s assets. This cap is set out in its code of practice rewrite issued for consultation in March and the logic for its inclusion was discussed in a blog issued by the Regulator in May (see Pensions Bulletin 2021/23).
Comment
Trustees of DB pension schemes have long-term responsibilities to pay their members’ pensions well into the future and trustees of both DB and DC schemes are increasingly seeking stable returns from UK businesses and projects that focus on balancing commercial success with long-term sustainability and social responsibility. An “Investment Big Bang” would therefore be welcomed by trustees, provided the Government acts to remove the barriers to such long-term investment and helps ensure there are suitable projects to invest in.
Separately, we are also pleased to see that the proposal to introduce a specific cap on unregulated investments has been abandoned given the range of factors and qualified advice that trustees must already consider prior to making any investment and the usefulness of some of these assets in cashflow planning for a maturing scheme.
GMP equalisation group issues supplemental guidance on transfer payments
In the light of the November 2020 judgment concerning the Lloyds Bank pension schemes (see Pensions Bulletin 2020/48), the cross-industry GMP equalisation working group has issued supplementary guidance on transfer payments where the member had a period of pensionable service in the transferring scheme during the equalisation period which qualified them for a GMP.
The guidance is set out in three parts and seeks to assist schemes and their advisers in finding a pragmatic approach to equalising historical transfers. For future transfers out, the guidance recommends that schemes seek actuarial advice and adopt transfer value factors so the values are calculated in a way that eliminates any GMP inequalities in respect of the equalisation period.
In relation to individual transfer values paid out of a scheme on an unequalised basis, the guidance considers how any necessary top-up payments should now be determined, the possibility that forfeiture rules may limit such payments and the extent to which trustees need to be proactive in addressing historical transfer values. On this last point there is a useful chart that encapsulates the process that trustees could adopt, with at each point the possibility that a top-up payment is not or cannot be made.
Turning to schemes which received individual transfer values, the guidance starts by stating that the legal obligations on such schemes remain uncertain. It goes on to separately examine the issues that receiving DB and DC schemes will need to consider, especially if offered a top-up payment from the previous scheme.
Finally, the guidance examines bulk transfers between schemes. Where mirror image benefits have been provided the position should be straightforward – the equalisation obligation resting solely with the receiving scheme and the transferring scheme not having to consider top-up payments. However, any legal agreements entered into as part of the bulk transfer might contain GMP inequality-type indemnities that may be worth examining.
Comment
This is very useful and accessible guidance from the GMP equalisation working group, setting out many of the complexities arising from where benefits have been transferred between schemes. Each scheme will need to reach its own conclusion on how to handle these issues as part of their GMP equalisation project.
