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Required state-enforced investment blueprint poses potential challenges for pension funds

UK pension funds lack the capacity to meet the required 10% minimum investment in private assets as designated.

Required state-enforced investment blueprint poses potential challenges for pension funds

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Pumping up the pressure on UK pension funds to invest 10% of their total assets in private sectors could spell trouble, warns Toby Glaysher. If the government insists on this mandatory quota, it risks transforming the Mansion House reforms from a pioneering vision into a blunt tool.

The initial intention, to subtly prompt pension funds to explore private markets, was already asking for a stretch. Now, with talk of binding percentages, we're straying into insanely prescriptive waters, potentially causing more harm than good.

Putting pension funds' Capital to work in sectors like infrastructure, private equity, and private credit sounds brilliant in theory. The downside? We're neglecting the operational, technological, and governance setbacks that the UK's pension funds grapple with today. Compared to their seasoned peers in Canada, most British pension schemes remain relative novices, managing both public and private assets at scale.

The Fine Print of Private Markets

Private markets come with challenges light-years apart from their publicly traded brethren: They're shrouded in mystery, virtually illiquid, pricey to manage, and infrequently updated. Fantastic to fantasize about long-term returns, but it's another story to get there while ensuring cost-effectiveness, accessibility, and accurate pricing - cornerstones of prudent pension management.

In this era of dwindling profits and rising pressure to deliver returns ASAP, fund managers are scrambling to trim fees, hit returns quicker, and tap into up-and-coming asset classes. With information fragmented, infrastructure crumbling, and risk monitoring as unpredictable as the stock market, the last thing they need is a rigid, top-down investment strategy.

The tech powering most UK pension schemes is still struggling to keep up. Marrying platforms capable of juggling private credit, private equity, and infrastructure investments with traditional bonds and equities is not only costly but years away from being practical for the average fund. Without proper tech overhaul, new assets allocations will amount to nothing more than bookkeeping exercises. Shallow commitments to illiquid investments without the means to monitor, value, or offload them safely.

This hybrid world also gives rise to stark valuation mismatches. Public assets are marked daily, while private holdings might only be revalued yearly. That timing disparity isn't just a nuisance—it impacts everything from pricing accuracy to liquidity stress testing. Trying to estimate a fund's worth at any given moment? Convincing beneficiaries their pensions are safe during a downturn? Good luck with that.

Glaysher's push seems to confuse ambition with coercion. The UK certainly needs a more dynamic pension system. But pension reform must be comprehensive, not cosmetic. Mandates are not a catch-all for competency. Until that's acknowledged, the Mansion House dream may yet turn into a miserable reality for UK pensions.

Toby Glaysher serves as the chairman of Finbourne Technology.

Enrichment Insights:

Lured by the allure of juicier returns, some pension funds might be tempted to recklessly allocate funds to private markets without assessing underlying risks. However, these moves can put both the investors and the beneficiaries at risk, as private markets possess a higher degree of volatility compared to publicly traded assets.

Prudent risk management calls for carefully evaluating these markets and understanding their unique characteristics, including illiquidity, opacity, and expense. On that front, strengthening risk management capabilities and adopting advanced analytics tools become crucial for pension funds aiming to navigate the murky waters of private markets.

Investing in private markets also calls for a more hands-on approach, as compared to managing publicly traded assets. Developing in-house expertise and establishing partnerships with asset managers that understand the intricacies of private markets can help mitigate these challenges.

Ultimately, a blend of strategic investment decisions, robust risk management, and efficient operational infrastructure will position pension funds to confidently navigate the world of private markets.

  1. Toby Glaysher, the chairman of Finbourne Technology, warns that mandating UK pension funds to invest 10% of their total assets in private sectors could lead to a transformation of the Mansion House reforms into an ineffective tool.
  2. The UK government's insistence on a mandatory 10% quota for private investments in pension funds might cause more harm than good, as it strays into insanely prescriptive waters, neglecting operational, technological, and governance challenges faced by UK pension funds.
  3. Pension fund managers, already under pressure to deliver returns rapidly, are faced with the challenge of managing private markets, which are characterized by illiquidity, high costs, and a lack of accurate pricing, making cost-effectiveness, accessibility, and pricing accuracy difficult to achieve.
  4. To navigate the complex world of private markets, pension funds need to strengthen their risk management capabilities, adopt advanced analytics tools, develop in-house expertise, and establish partnerships with asset managers who understand the intricacies of private markets.
  5. A blend of strategic investment decisions, robust risk management, and efficient operational infrastructure will enable pension funds to confidently invest in private markets and secure their beneficiaries' pensions, while avoiding unnecessary risk.
Mandated private asset allocation of 10% by UK pension funds faces potential capability issues

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