Not displaying correctly? View this email in your browser

NEWSLETTER | 31 January 2025

Cautious welcomes abound for Chancellor Rachel Reeves’ plan to release billions of pounds in ‘surplus’ held in the UK’s defined benefit (DB) pension schemes.

The excess reserves - worth GBP160 billion and which are very much attributable to an increase in gilt yields – would be used to support the government’s growth plans by allowing sponsoring companies to reinvest the money in their business or provide additional benefits to members of the pension scheme.

Reeves says the government and businesses are "united on growth being the top priority for our economy" and vowed to fight "every day to tear down the biggest barriers to growth, taking on regulators, planning processes and opposition to this urgent mission".

Positive comments from the Pensions and Lifetime Savings Association, The Pensions Regulator, professional trustees, investment managers and consultants demonstrate an acceptance that such a move is needed.

Alastair Greenlees, Head of Investment Strategy UK at Van Lanschot Kempen, says failure to use a statutory override mechanism to release surpluses would be "akin to missing a real goal-scoring opportunity which the Prime Minister, as a football fan, will surely be loath to do".

"By Labour’s own analysis of the GBP160 billion available, if they do not amend the statutory guidance on surplus extraction, they could potentially leave nearly GBP100 billion of it untouchable. For context, that is approximately the UK’s annual budget deficit – a massive opportunity. This is important as it should not be a ‘one-off’ boost to the economy and investment. It has the potential to release tens of billions in new surplus each year."

But the lack of detail from Reeves leaves Greenless uncomfortable noting that any override will need to ensure trustees and members enough additional protection for the risk taken.

"We believe one common misconception is that UK surpluses are magic money trees; they are not. UK DB scheme portfolios are skewed towards UK bond markets, which positively impacts government borrowing cost. Chancellor Reeves knows this. An alternative to simply using surpluses from schemes into the companies Reeves identifies as suitable would be for the government to provide opportunities for those schemes to fund the local things they want to see funded."

He adds: "Making UK pension schemes and UK corporates more productive is not a new desire, but much of the debate is overlooking a key question – will anyone bother? And indeed, will it be productive for the UK? Government direction and incentive is needed here to drive action."

It is worth remembering that not only are DB schemes not magic money trees, they are also vulnerable to desperate bouts of prolonged deficit.

It is only within recent memory that these plans, which exist solely to provide retirement security for millions of members, were scrambling for survival.

The Pension Protection Fund, set up within the last 20 years, exists because DB plans needed safeguarding when employers collapsed, and the idea that just when these schemes are looking relatively safe, they are considered ripe for harvest seems somewhat previous.

Of course, leaving money languishing in schemes which could be put to better, more productive use makes no sense, but lessons of the past must be heeded.

As others note, we must wait until spring for more detail, and I for one hope no legislation is rushed through in an attempt to use DB schemes to resolve government’s funding difficulties.

This week we spoke to Cesar Estrada, Private Markets Segment Head at Arcesium, a fintech company providing data-centric cloud-based solutions to alternative investment managers, about asset-backed lending, which is expected to grow at a compound annual growth rate of 11.32 per cent from 2024 to 2030, reaching nearly USD1324.75 billion. Estrada says: "ABL is more complex, but first and foremost, it is new to investment managers who are doing it for the first time. to this ground as they go into this investment strategies, sometimes they’re doing it for the first time, or they are scaling up. They need more technology, and it requires more attention and care."

We also looked at the CFA Institute’s study of Tokenisation and how that will impact capital markets.

Olivier Fines, CFA, Head of Policy Research and Advocacy at CFA Institute, comments: "Tokenisation can bring many benefits, but it’s not without risks. While benefits may include streamlined clearing and settlement, improved transparency and compliance controls, or greater market access through fractional ownership, there are significant challenges relating to cybersecurity, investor education, and regulation uncertainty."

In a week of news, we bring you the first Institutional Asset Manager podcast featuring Guernsey Finance’s Chief Executive, Rupert Pleasant. Guernsey won Best Offshore Fund Domicile in the Institutional Asset Manager Service Provider Awards of 2024 and in this podcast discusses the domicile’s current status as a financial centre and its offering to the asset management industry. Follow this link to listen to Off the Record on IAM.

Gill Wadsworth, Editor, Institutional Asset Manager

For live updates please follow us on Twitter and LinkedIn.

HFR writes that total global hedge fund capital surged to a record level to begin 2025 as the Trump Administration began, capping a strong performance year while navigating inflation, and interest rate and generational geopolitical uncertainty in 2024.

The government has announced plans to release GBP160 billion in "trapped surpluses" held by the UK’s defined benefit (DB) pension schemes.

Private credit has enjoyed considerable attention of late with asset managers espousing the various benefits of investing from diversification, liquidity premium and decent yields.