Millions of workers saving in company pension schemes will for the first time put their money into illiquid, unlisted assets. Legal & General has announced a new fund that could manage billions of pounds.
L&G, which runs occupational pension schemes for employers including Tesco and NatWest, said its new fund would put savers’ money into private equity, private debt and infrastructure – asset classes largely denied to pension savers.
The fund said it would “unlock private market access” for 5.2 million members of modern defined contribution plans and help deliver on the Mansion House Compact pledge to invest up to 5 percent of assets in private equity.
The new fund will have a significant bias towards the UK, with the aim of investing 30 to 35 percent of employees’ savings in UK assets, a much higher level of UK exposure than the mere 4 percent weighting in conventional listed share portfolios.
Both the Conservative and Labour parties have announced plans to try to move more pension fund money into productive UK assets, with some experts calling for mandatory UK allocations.
L&G said the ambition of the fund, to be called the L&G Private Markets Access Fund, was to attract £500 million of savings by the end of this year, £1 billion to £2 billion by the end of 2025 and then “grow exponentially from there”.
Pension schemes at the London Stock Exchange Group and EDF, the French energy company, have already expressed interest, while dozens of others are potential customers, including L&G’s own staff pension scheme.
L&G is one of the largest so-called master trusts, which is used by employers to automatically enrol staff into pension savings. It also runs single company schemes. Other employers that use L&G for staff pensions include Marks & Spencer, Kingfisher and Greggs.
Rita Butler-Jones, head of defined contribution pensions at L&G, said: “We have seen very strong interest from employers we have spoken to.” She added that the move was “an important milestone for UK pensions” and “a game-changer for DC pensions”.
Until now, the high fees and illiquidity of unlisted stocks and other private assets have discouraged many defined-contribution plans from shifting participants’ money into such hard-to-value assets. Investment advisers say savers may be missing out because these assets have generally delivered higher returns than listed securities over the long term and could therefore theoretically provide higher retirement income.
Nest, the government-backed pension scheme for auto-enrolled workers, has put the pensions of most of its 13 million members into private assets, embedding the asset class into its standard investment mix. The L&G approach is believed to be the first to use a standalone fund that can be dramatically expanded if demand is there.
L&G believes it has addressed concerns about the illiquidity of the underlying assets by requiring investors to give nine months’ notice for withdrawals. In extreme situations, it could temporarily ban redemptions.
Another concern is fees, which can be very high for private assets. The new fund will charge 1.1 per cent of assets, plus performance fees. This includes fees charged by the specialist sub-funds it invests in. With fees for more conventional investments now much lower, L&G believes pension funds can stay within the general 0.75 per cent cap on all default fund charges. The cap will no longer apply to member-selected funds.
According to the Ministry of Finance, a 5 percent allocation to private equity could increase the country’s pension income by up to 12 percentage points. However, many experts are skeptical of this claim.