Long-term investment and procylicality

May 27 2015


  • Sarah Breeden (Bank of England)

  • Ian Goldin (University of Oxford)

  • Joanne Segards (NAPF)

  • Ashok Gupta (Financial Reporting Council)



UK pension funds and insurers used to be the leading owners of the UK equity market, but now they hold directly only ten per cent between them. According to The Pension Regulator’s Purple Book: “Between 2006 and 2013, there was a marked fall in the share of equities in total assets (from 61.1 per cent to 35.1 per cent) and a marked rise in the share of gilts and fixed interest (from 28.3 per cent to 44.8 per cent).”

This reflects the fact that the UK’s “mature” defined benefit pension schemes, which still have about £1.2 trillion assets under management, are focused on paying pensions withsafe, income-yielding bonds. Riskier assets, including illiquid infrastructure projects with their long lead times, lose out in this “de-risking” scenario.

But one of our speakers, Ashok Gupta, has argued, in Financial World, that such an investment approach suits neither long-term investors, notably pension savers, nor life assurers covering long-term risks. He believes an over-reliance on market values in accounting and regulation has led to a mistaken focus on market risk, or price volatility.

Since price movements are not only volatile but cyclical, following them is procyclical; and if a fund management herd does it, the trend is reinforced. The Bank of England was concerned enough about this to form a working group to examine procyclical investment behaviour, and this round-table will hear about its findings.

If pro-cyclicality is to be resisted, how might fund managers be motivated to focus on long-term returns and fundamental value, including exhibiting contrarianism behaviour? And what role might be played by mobilising long-term savings to build the infrastructure that the economy needs?

A straw in the wind is that a new set of “immature” funds are emerging fuelled by auto-enrolled, work-based savings. Since the aim of such defined contribution schemes is to maximise the ultimate size of the pension pot, why wouldn’t they have a long-term view?

We are delighted to welcome three members of the BoE’s Procylicality Working Group to lead our discussion: 

  • Sarah Breeden, director for Major International Banks in the PRA’s International Banking Supervision Directorate;

  • Ian Goldin, director of the Oxford Martin School at the University of Oxford and one of the working group’s deputy chairs; and

  • Ashok Gupta, chairman of AA Insurance Services, a member of the Financial Reporting Council’s Actuarial Council and the other deputy chair of the group.

They will be joined on the panel by Joanne Segars, chief executive of the National Association of Pension Funds.