Should certain types of crypto be included in pension funds? Caitlin Southall is SSAS Director at WBR Group, looks at the potential upsides and the risks for pensions schemes and savers retirement income needs.
The long-discussed topic of cryptocurrency investment in pensions continues to rumble on, but perhaps with renewed vigour noting the recent changes implemented by the FCA.
On 8 October, the FCA announced that they had lifted the ban on retail access to ‘certain’ crypto exchange trade notes (cETNS). Retail investors will now be able to access some types of cETNS, if they are included on the FCA’s ‘Official List’ and are also admitted to trading on a UK recognised Investment Exchange. This marks a significant shift in the regulatory landscape and raises an important question, does this open the door for crypto to play a role in pension portfolios?
As part of their announcement, the FCA confirmed that they had already been reviewing investment documentation and prospectus provided by those on the ‘Official List’ ahead of the ban being lifted. The FCA’s statement was aimed at firms either offering, or planning to offer cETNS to the retail market, and in summary, confirms the need to comply with existing financial promotion rules, and Consumer Duty.
Here is where I start to wonder how this is achievable. Pensions are designed to provide stability and security over decades, not to chase speculative gains. Crypto investment poses an inherent challenge to this. I’ve seen some commentators refer to crypto investment as ‘gambling’, and you can understand this perspective.
Some crypto assets are notoriously unstable, with volatile asset values. However, as we’ve seen with Bitcoin, there are significant rewards to be made if the investment succeeds. Bitcoin has seen highs of £93,000 in the last 12 months, with lows of £62,000 – demonstrating the volatility
It is the fiduciary responsibility of pension trustees to diversify investment and as such all asset categories should be considered, however from the perspective of a SSAS Trustee, crypto is likely to be tough to justify for inclusion into the scheme. Crypto isn’t investment income. It is investing in a speculative investment with little protection in the event of a downturn. We recently saw an estimated $1bn hit on global crypto since mid-October. Let’s not forget that in 2023, the Parliamentary Treasury Select Committee reported that investing in crypto was a type of gambling.
Notwithstanding these previous concerns, the roadmap for crypto from the FCA appears to be accelerating. A technical consultation was launched in September this year (CP25/25) by the FCA, with a view to creating a cryptoasset sector ‘that enables innovation and is underpinned by market integrity and consumer protection’. A natural question is whether this framework is in place ahead of the recent opening of the market for retail investors. This framework is continuing to evolve, as the FCA try to balance innovation against prudence.
The risk is that if pensions are invested heavily in crypto, the key function of a pension, paying income and death benefits, may be difficult to fulfil. The volatility runs at direct odds with the need for sustainable and predictable liquidity.
Additionally, the FCA’s emphasis on compliance with Consumer Duty for cETNs places even more responsibility on firms to ensure that communications about crypto investments are ‘clear, fair, and not misleading’. This is likely to require enhanced disclosure on the volatility of crypto and the absence of compensation schemes such as FSCS. For SSAS and other bespoke pension arrangements like SIPPs, these obligations are likely to translate into higher compliance costs, requirements and reporting, as well as more stringent and complex governance frameworks.
I feel that the discussion around the appropriateness of crypto as a pension investment will continue until such time as there is full scale governance and regulations in place. However, there is an argument that small, careful investment in cETNS could bring about value for clients noting the initiation of governance by the FCA, as long as it forms part of a wider pension strategy that would enable the pension to continue to function and meet client needs.
Whilst the regulatory door may be opening slightly when it comes to crypto for retail investors, the practical barriers to hold it in a pension remain significant. Crypto might find a place in pensions as a small diversification vehicle as opposed to a core investment, but only if trustees can demonstrate robust risk management, good documentation and alignment with long-term retirement objectives. Until then, I suspect that the industry’s attitude towards crypto might still be on the cautious side.
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