Govt confirms ERI changes in effort to boost illiquid investments

The government has confirmed that it will push ahead with plans to remove certain restrictions on employer-related investments (ERI) currently applying to large pension schemes, in an effort to remove the 'red tape' surrounding illiquid investments.

The new regulations, which will apply to master trusts with 500 or more participating employers, are expected to maintain saver protections while removing disproportionate red tape and enabling schemes to access a broader range of investment options.

In particular, the government plans to lift certain ERI restrictions from large authorised defined contribution (DC) master trust pension schemes by amending the Occupational Pension Schemes (Investment) Regulations 2005 (“2005 Regulations”).

This amendment will mean that restrictions on ERI will only apply in relation to investment in the scheme funder, the scheme strategist, or a person who is connected with or an associate of the scheme funder or the scheme strategist.

The Department for Work and Pensions (DWP) confirmed the plans following its recent consultation, revealing in its response to Chapter 3 of the consultation, that the majority of industry responses were “supportive” of these measures, and agreed that the current regulations were a barrier.

Whilst it also acknowledged that a small number of respondents said that the current ERI restrictions are not the sole reason why master trusts do not invest in private debt/credit, these respondents did also accept that the draft regulations would improve flexibility regarding investment strategies.

Furthermore, the government revealed that only three respondents did not see the current ERI restrictions as a barrier to investment in private debt/credit.

The threshold of 500 participating employers prompted the most comment from stakeholder respondents, meanwhile, although most of those that provided an answer to this question agreed that the threshold was set at a "sensible level".

Commenting on the plans, Pensions Minister, Guy Opperman, said: “I am passionate about ensuring pension schemes have the tools and investment options to deliver the best possible outcomes for pension savers across the country.

“These measures remove red tape and will enable schemes – and savers – to benefit from more diversified portfolios.”

The plans are the latest in a string of government measures to encourage greater investment in illiquid assets, or productive finance, with DWP also recently confirming that it would push ahead with changes to the DC charge cap as part of these efforts.

The government's consultation on the ERI changes also included proposals for DC pension schemes to “disclose and explain” their policies on illiquid investment in their Statements of Investment Principles (SIP), which industry experts have raised concerns over, although the government has yet to respond to this chapter of the consultation.

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