The £ 57 billion BT pension fund has made proposals from the UK regulator to limit investments in unlisted assets, saying the move is a “blunt tool” that could hinder the nation’s transition to a green economy.
Pension regulators have proposed limiting pension plans’ investments in private market goods such as real estate and infrastructure to no more than one-fifth of the plan’s portfolio to reduce the risk of systems being forced into vendors in poor markets.
However, the BT program, one of the largest in Europe, said the cap represented a “significant change” in the way investment rules are interpreted and implemented and could hamper its efforts to break away from employer’s cash support. The £ 8 billion deficit system is already close to the regulator’s proposed 20 percent investment limit.
“While we appreciate the intent here to ensure that pension systems have sufficient liquidity and flexibility in their portfolios, we fear that this change would have significant unintended consequences,” said Morten Nilsson, executive director of the 200,000 member company BT systems.
“Well-managed systems often actively seek to take advantage of the illiquidity premium from unlisted investments that are not traded on regulated markets, e.g. B. Real estate, private equity and infrastructure investments. These types of investments are very well suited to the needs of long-term pension investors but are not necessarily traded on regulated markets, ”he said.
Nilsson told the Financial Times that there was also an interruption to the regulator’s proposals and a wider government request for pension funds to pour more cash into illiquid assets to aid the country’s economic recovery and green transition.
He added that it “doesn’t make sense” to narrow down investment decisions for the system, which aims to be self-sufficient or not relying on employer support by 2034.
BT recently agreed to invest an additional £ 2.7 billion in the system through June 2023 to help address its deficit.
“My personal view is that the cap is a very blunt tool for something that is very complicated,” said Nilsson.
BT’s concerns about the regulator’s proposed cap have been corroborated by other large defined benefit schemes that promise to pay members a secure income for life based on salary and length of service.
“We understand TPR’s intentions here, but the unintended consequences may be significant,” the £ 80 billion university superannuation scheme, which has 420,000 members, told the FT in a statement. “We would not be able to invest in what we consider to be in the best interests of our members and the options for accessing investment returns in line with our liabilities would be reduced.”
The regulator’s proposals are believed to focus on smaller systems that have “taken advantage” of regulations by investing up to half of their portfolios in unregulated assets.
The regulator acknowledged “concerns” about the proposed investment limit and said it was considering what “adjustments might be appropriate for its plans”.
“In issuing our Consultative Code, we found it helpful to set an appropriate maximum allocation for any system other than exceptional circumstances,” said David Fairs, Executive Director, Regulatory Policy.
“However, we do not want this expectation to limit the ability of trustees to invest in assets that may be illiquid and that provide an opportunity to improve the results of the system once they have received appropriate advice and understood the liquidity risks of their system.”