UK

British businesses risk being starved of investment as pension funds sell off assets to meet a wave of retirement claims, Goldman Sachs has warned.

Analysts at the Wall Street bank have sounded the alarm over investment levels flatlining in the UK after research found final salary schemes are selling almost as many British stocks as other pension funds are buying. This has meant that UK-listed companies are receiving just £500m in net investment from pension funds each year.

Goldman Sachs said defined benefit (DB) schemes – which pay a fixed income but are largely closed to new savers – are selling £2.5bn of shares per quarter to pay out pensions to retirees.

At the same time, defined contribution (DC) pensions – which do not guarantee a specific income but depend on the performance of financial markets – are buying £3bn of equities over the same period.

However, the vast majority of this net investment is being ploughed into foreign stock markets, with only a quarter being diverted to British stocks.

  Yahoo Finance

(FT) Pension funds are resisting a UK government push to invest up to £50bn in projects and business to support economic growth, saying the country is not an attractive enough destination for more of their capital.

Executives from the £1.3tn sector attending a conference in Manchester on Wednesday said funds looking to support the government’s growth agenda amid high pressure on public finances were encountering myriad barriers.

These ranged from a lack of suitable investment opportunities to concerns about the high-risk nature of the areas the government was most keen for funds to plough their cash into.

  FT

CNN. The UK economy badly needs a boost — and the government hopes the nation’s vast pension savings might deliver one. UK finance minister Jeremy Hunt announced Monday that nine of Britain’s biggest pension providers had agreed to increase their investments in high-growth UK companies, a move that he said could unleash up to £50 billion ($64.5 billion) of funding if other pension funds followed suit.

As part of the compact, firms including Aviva (AIVAF), Legal & General (LGGNY) and Mercer have committed to allocate at least 5% of assets in their default funds to unlisted companies by 2030. All UK workplace pension plans offer default funds, which savers who don’t choose their own investment strategy are automatically enrolled into.

Financial Times. Chancellor Jeremy Hunt has been urged by the UK pensions industry not to force retirement schemes to invest in riskier and complex assets including fastgrowing young British companies, and infrastructure.

Hunt has said he would not be “instinctively comfortable” with ordering pension binds where to invest some of their money, but has not ruled out such a move as he looks for ways to boost Britain’s sluggish economy.

TIMES. The government has been urged by a senior adviser to create “super pension funds” to unlock “enormous amounts of capital” to stem the flow of high-growth companies away from Britain.

Sir John Bell, a drugs industry veteran who was behind the government’s life sciences vision, is calling for pension schemes to be bundled together to create about five “really big” superfunds to invest in sectors including science and technology.

FT. The gilt market rout that forced UK pension funds to rapidly sell assets in September contributed to driving down the value of retirement schemes by as much as £500 bn, MPs were told on Wednesday.

Giving evidence to the Commons’ work and pensions select committee, Iain Clacher, a professor at Leeds University Business School, said based on his calculations “roughly £500bn is probably missing somewhere”.

“And this isn’t a paper loss,” he added. “This is a real loss because pension funds were selling assets to meet the collateral calls.”

Thousands of corporate pension plans had to raise cash to meet urgent calls on so-called liability-driven investing (LDI) strategies as gilt yields shot up following the government’s bungled “mini” Budget.

WP. There have been two underlying problems for defined-benefit corporate pension funds. The first is that the companies want nothing to do with them, as they increase the volatility of profits and were underfunded for many years, often requiring an injection of money. The second is that successive governments have used pensions as a piggy bank.

In between scrapping tax relief on dividends in 1997 and announcing a change in 2020 to the inflation calculation for inflation-linked bonds to a method that suppressed reported inflation numbers, the government was very happy to stuff savers, pension funds included, with quantitative easing. The result was that lower long-term interest rates massively increased the current value of pension fund liabilities.

  Washington Post

FT. It is beyond ironic that an investment strategy that claimed to eliminate risk threatened the unprecedented failure of the UK pension system this week. The main focus of attention so far in probing what went wrong has been on what took place over the few days leading up to the Bank of England’s emergency intervention on Wednesday to stem a crisis in pension funds over so-called liability driven investment strategies.

These strategies aim to hedge the liabilities of funds to meet their pension promises with the use of derivatives. But they suddenly exposed the sector to a now infamous “doom loop”, when falls in gilt prices triggered calls on schemes to provide more collateral on such trades, in turn spurring more sales of UK government bonds to raise cash. (…)

A Turkish group managing military pensions entered exclusive talks to buy British Steel, the first step in a rescue that could save about  5000 jobs in the U.K.’s manufacturing heartland.

The U.K.’s No. 2 steelmaker was put into liquidation in May, just three years after being acquired by private equity firm Greybull Capital LLP for 1 pound. In addition to contracting demand, surging costs and cheap imports, British steelmakers face uncertainty around Brexit, with some European Union customers concerned that tariffs could be imposed on shipments from the U.K.

Oyak Group, with assets of more than $19 billion, will review British Steel over the next two months, while talking to the company’s customers, suppliers, employees and labor unions. Oyak’s Ataer Holdings unit, which co-owns steelmakers in Turkey, is the preferred buyer after making an “acceptable” offer, the U.K.’s Insolvency Service said.

  Bloomberg

Britain’s competitions watchdog will look into the advice given by consultants to pension schemes and other institutions managing over 1.6 trillion pounds of funds, to see if there are conflicts of interest, it said on Thursday.

The Competition and Markets Authority (CMA) will assess whether investment consultants offer a poor level of service and whether difficulties comparing and switching consultants provide little incentive for them to compete for customers.

In addition, it will investigate if there are barriers to entry into the investment consultancy sector, it said in a statement providing more detail on the probe it launched last week.

  Reuters

Despite some distinctly high-profile instances of economic and political uncertainty during the course of 2016, Moneyfacts data showed the average pension fund finished the year up by 15.7% – 13.1 percentage points higher than in 2015, when pension fund growth was just 2.6% on average.

This is the fifth consecutive year of positive pension fund growth and, Moneyfacts said, would be welcome news to those saving into a defined contribution pension scheme, as well as to the growing number of retirees who remain invested in pension funds by opting for income drawdown.

Of all the pension funds surveyed, the great majority (94%) delivered positive growth during 2016. In terms of the leading ABI pension fund sectors, Commodity/Energy (70.9%), Global Emerging Markets (32.4%) and North America Equities (31.2%) led the way.

  Prof.Adviser / property118 / Moneyfacts