Form Over Function: Why the Pensions Bill Risks Undermining Productive Finance
By Alexander Denny
The UK government’s ambition to unlock defined contribution (DC) pension assets to fuel "productive finance"—directing capital into private equity, venture capital, infrastructure, and private credit—is one of the most significant structural shifts in modern UK financial policy. It is an objective I, alongside the vast majority of the investment industry, wholeheartedly support.
Yet, as the Pensions Bill makes its way through parliament, we find ourselves on the precipice of an illogical and counterproductive drafting error: excluding listed investment companies from the scope of "qualifying assets," purely because of their legal wrapper.
To explore this critical policy misalignment, I have published a new white paper: "Liquidity, Listing, and Limitations: Why excluding investment companies from the pensions bill risks undermining productive finance."
This paper argues that regulating by legal form rather than economic substance is not only a missed opportunity for pension savers, but a fundamental misunderstanding of how capital actually flows into the real economy.
The Conflation of Corporate Wrappers
The core of the issue lies in the drafting of the Bill’s definition of "qualifying assets." Under current terms, the legislation explicitly excludes "securities listed on a recognised investment exchange" under section $1005$ of the Income Tax Act $2007$.
The policy intent behind this is obvious: civil servants want to prevent DC schemes from fulfilling their "productive finance" mandates by simply buying secondary shares in mainstream listed operating companies—such as utilities, commercial banks, or homebuilders—where secondary transactions do not inject fresh capital into underlying businesses.
But in writing this sweeping exclusion, policymakers have made a classic structural error. They have conflated operating companies with investment companies.
An investment trust is not a commercial trading business. It is a dedicated, pooled asset vehicle. Its sole economic function is to hold and manage an underlying portfolio of private, illiquid, or real assets. By excluding listed investment companies, the Bill inadvertently outlaws some of the most established, highly governed, and successful routes to private markets in the UK.
A Perspective from Three Sides of the Table
I have observed this structural debate from almost every conceivable vantage point in the institutional ecosystem:
As a former Trustee Board Member of the Fidelity UK Pension Plan, where I sat with fiduciary responsibility for balancing sponsor-trustee dynamics and managing complex hybrid DB/DC default structures.
As a former Non-Executive Director of Apax Global Alpha Limited (a FTSE 250 private equity investment trust), experiencing firsthand the governance, valuation, and market pricing realities of a listed vehicle.
As Managing Director of European Distribution at Pantheon, designing and launching complex semi-liquid, open-ended private market structures specifically tailored to open up private equity to DC pension allocations.
From this multi-layered experience, it is clear to me that the current legislative draft creates an artificial and highly unstable hierarchy of fund structures. It privileges newer, untested open-ended "semi-liquid" structures, such as Long-Term Asset Funds (LTAFs), while locked-ended listed investment trusts—which have successfully delivered private market returns to UK investors for over a century—are left out in the cold.
The Flawed "Capital Formation" Argument
The primary justification offered by the Department for Work and Pensions (DWP) for keeping investment trusts out of scope is that buying shares on the secondary market does not generate "new" capital for businesses.
This argument is both cyclical and incomplete:
It Ignores the Primary Capital Cycle: While it is true that many alternative investment trusts currently trade at discounts to Net Asset Value (NAV), rendering primary share issuance difficult, this is a market cycle, not a structural permanent state. Only a few years ago, listed infrastructure, renewable energy, and private equity trusts were regularly issuing shares to meet demand, raising billions of pounds of fresh primary capital for deployment. Discount narrowing through secondary buying is the natural, inevitable precursor to renewed primary issuance.
Double Standards on Secondary Sourcing: Many of the newer unlisted and semi-liquid vehicles currently being promoted as "pure" productive finance routes regularly acquire their portfolios through private secondary market transactions. These unlisted secondary purchases do not represent "new" primary capital formation either, yet they are fully welcomed within the scope of the Bill.
If the government’s metric is strict, direct, day-one primary capital injection, then both listed and unlisted routes can succeed or fail depending on market conditions. Singling out investment trusts for exclusion is fundamentally inconsistent.
The Power of a Blended Portfolio Ecosystem
From a practical portfolio construction perspective, excluding listed trusts removes a critical tool for pension trustees. DC pension schemes require daily dealing, predictable liquidity, and transparent valuation frameworks.
Listed investment trusts offer a brilliant, highly complementary counterweight to unlisted private assets by providing:
Immediate Exposure: Allowing schemes to gain diversified private market exposure instantly, removing the prolonged "cash drag" associated with waiting for traditional private capital commitments to be drawn down.
A Liquidity Buffer: Serving as a liquid, daily-traded buffer during periods of macroeconomic stress without triggering gating risks or halting asset redemptions.
Lower Operational Complexity: Providing smaller, less well-resourced schemes with an accessible, robustly governed wrapper to access venture capital, green energy, and infrastructure.
A resilient productive finance framework should not force trustees into a single, narrow structural channel. It should encourage a healthy, blended ecosystem of traditional private funds, unlisted LTAFs, and listed investment companies.
A Precise, Low-Risk Remedy
Fortunately, a highly practical solution is already on the table. The Association of Investment Companies (AIC) has proposed a targeted amendment.
In short, it would permit the inclusion of securities listed under Chapter $11$ of the UK Listing Rules or the Specialist Fund Segment, provided those vehicles are dedicated to holding qualifying productive assets. This simple change preserves the exclusion of mainstream listed corporates while allowing specialist, closed-ended pools of capital to participate.
At its core, this debate is about whether UK financial policy will be guided by economic substance or legal wrapper. If we genuinely want to improve long-term outcomes for UK pension savers while driving massive capital allocations into the real economy, we must choose substance.
I invite you to read the full analysis, explore the market data, and download the complete paper below.
Keywords: Pensions Bill, Productive Finance, Investment Trusts, Corporate Governance, Private Equity, LTAF, Fiduciary Duty, UK Government Policy, AIC Amendment
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