Legal & General announced a new fund that can handle billions of pounds. This will allow millions of employees to invest their workplace pension savings in illiquid assets.
L&G operates workplace pension schemes, including those for Tesco and NatWest. Its new fund will invest the money of pension savers in private equity, debt, and infrastructure – asset classes that are largely unavailable to pension savers.
The fund will “unlock private markets access” for 5,2 million members of modern defined contribution schemes, and help meet its Mansion House Compact pledge of putting up to 5% of assets into private equity.
The new fund has a significant bias towards the UK. It aims to place 30 to 35 percent of employee savings in British assets. This is a higher level of UK exposure compared with the conventional listed shares portfolios, which only have 4 percent of their weighting in UK assets.
Some experts have called for mandatory UK allocations. Both the Conservatives and Labour Parties have announced plans to redirect more pension funds into British productive assets.
L&G stated that it hoped to raise £500 million from savers by the end this year and £1 billion up to £2 billion between 2025-2025. The fund would then “grow rapidly” thereafter.
London Stock Exchange Group’s pension schemes and EDF (the French energy company) have both expressed interest. Dutzende more customers are also potential clients, including L&G staff pension scheme.
L&G is one the largest master trusts that employers use to enroll their employees in pension savings. It operates single-company schemes. Marks & Spencer and Greggs are among the other employers who use L&G to provide pensions for their staff.
Rita Butler Jones, L&G’s head of defined contribution pensions, stated that “we’ve seen an extremely strong appetite among employers we’ve talked to.” She also added that this move was “a milestone for UK pensions”, and “a game changer for DC pensions”.
Up until now, the high fees and illiquidity associated with unlisted shares and private assets has deterred defined contribution pension schemes from investing their members’ money in these hard-to value assets. Savings consultants claim that savers are missing out on a great opportunity because unlisted shares and other private assets have historically produced higher returns than listed securities.
Nest, a government-backed pension plan for auto-enrolled workers, invested the pensions of the majority of its 13,000,000 members in private assets, by integrating the asset class as part of its default investment mix. L&G’s approach is believed to be the very first to have a separate fund that can be increased dramatically if demand is high.
L&G is confident that it has dealt with concerns over the illiquidity underlying assets, by requiring investors give nine-month notice before withdrawing. It could temporarily ban redemptions in extreme circumstances.
A second concern was the fees that can be high for private assets. The new fund charges 1.1 percent of assets plus performance fees. This includes fees charged by sub-funds that it invests in. L&G believes pension funds can stay within the 0.75 percent cap for all charges on default funds, as fees for conventional investments are much lower. The cap does not apply to funds chosen by members.
Many experts have questioned the Treasury’s claim that a 5% allocation to private equity can boost pension incomes up to 12 percent.
Post Disclaimer