The Bank of England governor has suggested that financial regulations on pension schemes could be loosened to allow them to invest in higher long-term “productive investments”.
Speaking to the TheCityUK business group yesterday (November 17), Andrew Bailey said investment “on a much larger scale than we have seen in recent years” would be needed to ensure the economy would recover successfully from the coronavirus crisis.
He warned that progress in this area was being stalled because regulations stop defined contribution schemes investing in illiquid long-term assets, such as property.
Mr Bailey said: “We are emphasising work on the supply of finance for productive investment, which is important for long-term growth and for financial stability.”
He said the BoE was looking into the reasons why DC pension funds invest only a small proportion of their assets in less liquid investments and whether regulations could be changed to address this without undermining the safety of banks and insurers.
It is also looking at how investment fund structures can safely support necessary investment in certain illiquid assets.
Steven Cameron, pensions director at Aegon, said while it was positive that the BoE is looking at how to remove barriers or offer “encouragement” so that schemes invest more in illiquid investments, it must not impact on what is in the members’ best interests.
Mr Cameron said: “It’s only the largest pension schemes which are likely to see such investments as viable and this is one reason why the government is separately looking to drive scheme consolidation so there are fewer, but larger defined contribution pension schemes.
“Unlike defined benefit schemes, modern defined contribution schemes allow their members to view the value of their pension pot, and switch between funds, on a daily basis.
“Furthermore, members have a legal right to transfer their pension to other schemes and under pension freedoms can draw their retirement benefits at any time from age 55.
“Pension rules don’t permit the scheme to defer paying out, which does create issues if part of a member’s entitlement is invested in illiquid investments.”
In addition, Mr Cameron flagged that the Financial Conduct Authority was currently consulting on introducing mandatory notice periods to property funds to avoid these having to hold large holdings in liquid assets.
He said: “Unfortunately, this would exacerbate issues for defined contribution pension schemes and rather than leading to a greater investment in illiquid assets, could actually reduce their willingness to invest in them.”
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