Contribution
That was fun. I will have a go at explaining the Government’s narrative on this, which is an alternative to the narrative that has been established so far. I will then try to go through and answer as many of the questions as I can.
Let me start by stating the obvious. The amendments relate largely to the part of Clause 40 that determines which types of investment are deemed as qualifying assets for the purpose of meeting any asset allocation requirements were we to use the power. I stated in my opening reply to the noble Viscount, Lord Younger, that he said “when” mandation comes in, but it is very much “if”; we do not anticipate using this power but, if it were used, we would need to be clear about what happens next.
The most relevant provisions are found in new Section 28C(5). This broadly limits qualifying assets to private assets. The subsection provides by way of example that qualifying assets may include private equity, private debt, venture capital or interests in land—that is, property investments. It also clarifies that qualifying assets may include investments and shares quoted on SME growth markets, such as AIM and Aquis.
In contrast, according to this subsection, qualifying assets may not generally include listed securities, defined as securities listed on a recognised investment exchange. That approach reflects the aim of the power to work as a limited backstop to the commitments that the DC pensions industry has made, which relate to private assets only.
That brings me to the subjects of the amendments from the noble Baronesses, Lady Bowles and Lady Altmann. I start by reminding the Committee of the rationale for this approach, because it stems from the Mansion House Accord. The accord was developed to address a clear structural issue in our pensions market. DC schemes, particularly in their default funds, are heavily concentrated in listed, liquid assets and have very low allocations to private markets. That is in contrast to a number of other leading pension systems internationally, which allocate materially more to unlisted private equity, infrastructure, venture capital and similar assets.
The reason the Government are so supportive of the accord is that it will help to correct that imbalance and bring the UK into line with international practice. A modest but meaningful allocation to private markets can, within a diversified portfolio, improve long-term outcomes for savers and support productive investment in the real economy, including here in the UK.
The reserve power in Clause 40 is designed as a narrow backstop to those voluntary commitments. For that reason, any definition of “qualifying assets” must be clear, tightly focused on the assets we actually want to target and operationally workable for schemes, regulators and government. That is the context on the question of listed investment trusts and other listed investment companies.
I recognise the important role that investment trusts play in UK capital markets and in financing the real economy. Pension schemes—as the noble Baroness, Lady Noakes, pointed out—are, and will remain, free to invest in wherever trustees consider that to be in members’ best interests.
However, the clear intention of this policy has been to focus on unlisted private assets. This is reflected in industry documentation underpinning the accord, which defines private markets as unlisted asset classes, including equities, property, infrastructure and debt, and refers to investments held directly or through unlisted funds. That definition was reached following a number of iterative discussions led by industry, as part of which the Government supported the definition being drawn in this way.
Bringing listed investment funds within the qualifying asset definition would be out of step with the deliberate approach of the accord and its focus on addressing the specific imbalance regarding allocation to private assets. It would also raise implementation challenges, requiring distinctions to be made between the different types of listed companies that make or hold private investments or assets. It would introduce uncertainty about what we expect from DC providers. We might justly be accused of moving the goalposts, having already welcomed the accord, with its current scope, in no uncertain terms.
But the line has to be drawn somewhere. This is not a judgment on the intrinsic qualities or importance of listed investment vehicles, nor does it limit schemes’ ability to invest in them. It is simply about structuring a narrow, targeted power so that it does what it is intended to do: underpin a voluntary agreement aimed at increasing exposure to unlisted private markets in as simple a way as possible and without cutting across schemes’ broader investment freedoms.
The legislation draws a general distinction between listed securities and private assets; it does not single out investment trusts. Any listed security, whether a gilt, main market equity or listed investment company, is treated in the same way for the purposes of this narrow definition.
Crucially, this concerns only a small proportion of portfolios. Under the accord, the remaining 90% of default fund assets can continue to be invested in any listed instrument, including investment trusts, where trustees and scheme managers judge that that would benefit their members.
I am just coming to the answers, but please ask some more questions.