As Thames Water’s financial troubles raise questions about such investments, Britain will next week try to persuade pension schemes to plough billions of pounds into infrastructure and start-ups in its next leg of post-Brexit reforms.
British Finance Minister Jeremy Hunt will on Monday set out the government’s latest thinking on getting cash locked up in pension pots to work in the economy.
Britain is trying to re-establish its position in the world of global finance as it feels the impact of leaving the European Union’s single market on one of its most important sectors.
Hunt is expected to announce a list of insurers and asset managers signed up in principle to invest more in alternative assets, a senior industry source said, during his annual speech to grandees of finance at the City of London’s Mansion House.
The Conservative government’s long-trailed policy focuses on persuading pension schemes to invest a portion of their money in infrastructure, start-ups and ‘green’ technology.
But the problems at Thames Water, which is battling for survival under 14 billion pounds ($18 billion) of debt, would leave some pension schemes that had made large investments in it embarrassed, said independent pensions consultant John Ralfe.
“It’s not good news for a government that is banging the drum for companies investing in infrastructure,” Ralfe said.
The finance ministry had no immediate comment on Hunt’s speech, but the pensions industry has already said it opposes mandatory investment quotas.
A second senior industry source said they feared some reforms under discussion could introduce unnecessary risk to older, so-called defined benefit pension schemes, though there was some support for voluntary targets on defined contribution schemes where payouts for members were less certain.
These targets could include investing 5% of a pension pot in infrastructure and 5% in venture capital, but could mean higher fees due to their complexity. A public consultation on firmer proposals is expected in the autumn.
“They look like they are flailing around for a policy that might win them votes. But something as big as this will require primary legislation, and frankly, I don’t think they will be able to fit this all in before an election,” the source said.
Britain is expected to go to the polls next year, meaning time is running out to put forward new legislation.
Another executive at a global asset manager, who also declined to be named, said the most effective policy would be to combine pension pots in Britain’s fragmented savings industry and emulate Australia’s ‘superannuation’ pensions system, which could take time as previous attempts made slow progress.
“Nobody forced the Australians to invest in alternatives,” this source said, adding that bigger pensions pots would likely be more inclined to allocate a proportion of their funds to riskier asset classes.
Britain’s financial services were largely cut off from the EU due to Brexit, with Amsterdam overtaking London as the region’s biggest share trading centre.
UK chip designer ARM’s decision to list in New York and not London has also piled pressure on Britain to bolster the City’s attraction as a global financial centre.
An initial batch of reforms are already underway, and Hunt’s speech will signal a new leg that also includes the outcome of a report which is expected to recommend ways to ease so-called ‘unbundling’ rules inherited from the EU.
These dictate how banks charge customers for research on companies to attract more listings. The EU is already easing its own version.
An update is also expected from a report on digitalising how stock and bond transactions are processed, which is expected to call for improvements in how companies communicate with their investors, and push for a fully paperless transaction trail, an industry source said.
Hunt could indicate if Britain intends to mirror Wall Street’s move to halve the time for completing a stock trade to a day to increase efficiency and ease burdens on banks, the source added.