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UK regulator’s investment cap too restrictive, warns BT pension fund


The £57bn BT pension fund has hit out at proposals by the UK regulator to cap investment in unlisted assets, saying the move was a “blunt tool” that could hamper the nation’s shift to a green economy.

The Pensions Regulator has proposed restricting pension scheme investment in private market assets, such as property and infrastructure, to no more than a fifth of the plan’s portfolio, to reduce the risk of schemes being forced sellers in poor markets.

But the BT scheme, one of Europe’s largest, said the cap represented a “major step change” in the interpretation and implementation of investment regulations, and could hinder its efforts to wean itself off employer cash support. The scheme, which has an £8bn deficit, is already near the 20 per cent investment limit proposed by the regulator.

“While we appreciate that the intention here is to ensure that pension schemes have adequate liquidity and flexibility in their portfolios, we are concerned that this change would have significant unintended consequences,” said Morten Nilsson, chief executive of the 200,000-member BT scheme.

“Well managed schemes often actively seek to exploit the illiquidity premium through unlisted investments not traded on regulated markets, for example, property, private equity and infrastructure investments. These types of investments are very well aligned with the needs of long-term pension investors but are not necessarily traded on regulated markets,” he said.

Nilsson told the Financial Times there was also a disconnect with the regulator’s proposals and a wider government desire for pension funds to direct more cash to illiquid assets to help the nation’s economic recovery and green transition.

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He added that it did not seem “sensible” to restrict investment choices for the scheme, which is aiming to be self-sufficient, or not reliant on employer support, by 2034.

BT has recently agreed to inject a further £2.7bn into the scheme by June 2023 to deal with its deficit.

“My personal view is the cap is a very blunt tool for something that is very complicated,” said Nilsson.

BT’s concerns about the regulator’s proposed cap were echoed by other large defined benefit schemes, which promise to pay a secure income for life to members, based on salary and length of service.

“We understand TPR’s intentions here but the unintended consequences are potentially significant,” the £80bn Universities Superannuation Scheme, which has 420,000 members, told the FT in a statement. “We would not be able to invest in ways we consider to be in the best interests of our members, and the options available to access investment returns consistent with our liabilities would be reduced.”

The regulator’s proposals are understood to focus on smaller schemes that have “exploited” regulations by investing up to half of their portfolio in unregulated investments.

The regulator acknowledged “concerns” about its proposed investment limit and said it was considering what “adjustments might be appropriate” to its plans.

“In issuing our code for consultation, we believed it would be helpful to set out an appropriate maximum allocation for any scheme other than in exceptional circumstances,” said David Fairs, executive director of regulatory policy.

“However, we do not want this expectation to limit the ability of trustees to invest in assets which may be illiquid and which may offer the opportunity of improved scheme outcomes, once they have taken appropriate advice and understand their scheme’s liquidity risks.”

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