The Bank of England governor signalled on Tuesday that he favours loosening financial regulations in an attempt to foster higher long-term “productive investment” as the UK recovers from the coronavirus crisis.
Speaking to the TheCityUK business group, Andrew Bailey said that if the UK economy was going to recover successfully from the crisis, it would require business investment “on a much larger scale than we have seen in recent years”.
This, he added, was partly held back because the government’s financial regulations were standing in the way of defined contribution pension schemes investing in illiquid long-term assets, such as property and infrastructure.
“We live in a time where there appears to be no shortage of aggregate saving, but investment is weak,” Mr Bailey said.
The governor was clear that he did not see increased corporate debt financed by bank loans or corporate debt as the solution to this requirement for productive capital because it was imperative to avoid “excessive leverage”.
“While the current low level of interest rates supports the sustainability of UK corporate debt, higher leverage would make the corporate sector more vulnerable to interest rate or earnings shocks,” the governor said.
Instead, he said the BoE was examining the reasons why defined contribution pension funds put little money in less liquid investments and whether regulations could be changed to reverse that without undermining the safety of banks, insurers or investment funds.
Tens of millions of people in the UK are saving into defined contribution pension plans, where their eventual retirement fund is dependent on investment returns from assets held in their portfolio and what they pay in.
The BoE knows it must be careful to avoid a repeat of the situation with the funds operated by Neil Woodford last year which invested heavily in illiquid assets but offered customers immediate access to their money. The funds collapsed when they were unable to meet high demand for withdrawals.
Mr Bailey’s comments follow government efforts to encourage UK pension plans, with trillions of pounds in assets, to play a bigger role in the nation’s economic recovery.
Ministers have proposed easing rules around a 0.75 per cent cap on workplace pension investment charges for auto-enrolled workers to enable schemes to invest in a more diverse range of long-term assets, including green infrastructure. These are typically more expensive assets to invest in.
Last week, Rishi Sunak, chancellor, pledged to have the UK’s first long-term asset fund, focusing on ploughing cash into illiquid assets, such as property and infrastructure, up and running within a year.
The chancellor said he was committing to the asset fund to help “encourage” UK pension funds, with tens of millions of members, to direct more of their capital towards “our economic recovery”.
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While pension schemes already invest in infrastructure, such as offices and buildings, some plan trustees cautioned against retirement cash being used as a recovery fund for the nation.
“Pension schemes have to try and get the best return for members. That is their first job,” said Richard Butcher, managing director of PTL, a firm of independent trustees, and chair of the Pensions and Lifetime Savings Association, a trade association for workplace pensions.
“If we fail in this, the pension system becomes, in effect, a big piggy bank for any good, bad or indifferent government initiative.”