Pension funds are being driven away from UK investment trusts - Ros Altmann

Investment companies are a model that has been particularly successful in mobilising long-term capital to further the UK’s ambitions across energy, social and economic infrastructure. They have been around for over 150 years and are one of the jewels in our financial markets' crown. Many pension funds, seeking to diversify their portfolios into alternative, less liquid investments, have relied on investment companies, but are now nervous of the market.

The Chancellor’s Mansion House reforms want more pension investment in UK infrastructure and net zero transition businesses, which would ideally be through investment trusts. Many pension funds could not achieve sufficient diversification if they were investing in individual projects directly, and they do not have specialist expertise.

UK investment trusts have focussed on these specific sectors to raise capital for long-term investments, so using tried and tested investment trusts would enable pension funds to invest for the long-term with less risk.

The UK investment companies sector is a highly innovative part of the global financial ecosystem, and a distinctively British success story. These are ready-made vehicles for exposure to alternative energy, infrastructure and housing projects, as envisaged by the Chancellor’s Mansion House Reforms, potentially alongside the Long Term Asset Funds (LTAFs), once they are set up.

Closed-end companies are more suited to patient capital than open-ended vehicles, as they do not have to sell underlying illiquid assets if a few investors need to withdraw capital. Unfortunately, because of the market crisis that has developed in the past year, some pension investors, including local authority pension funds, are losing faith in using UK investment trusts.

The Financial Conduct Authority (FCA) has failed to act while the new charges disclosure adds to serious economic damage, which needs to be urgently addressed as UK competitiveness and growth are at risk.

This is not a small problem and has very real impacts for the UK economy. The Government’s Net Zero ambitions rely heavily on private sector funding, so ongoing problems are likely to materially impact our ability to meet decarbonisation targets.

And this does not just affect clean energy, as major UK listed investment companies also focus on healthcare assets, logistics facilities, data centres, schools, roads and the electricity grid. The current regulatory environment is starving these investments of capital, just as we need a mechanism for pensions and private sector assets to invest in attractive UK projects. There are tens of billions of pounds worth of unmet potential UK funding opportunities, as investment companies cannot raise capital due in large part to ill-conceived guidance which has compounded an already difficult UK equity market environment, especially amid rising interest rates.

Baroness Ros Altmann is a British life peer and former pensions minister.