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Unlocking Potential – is a Small Allocation to Bitcoin in Pension Schemes Prudent and Legal?
The evolving landscape of investment opportunities in Bitcoin has sparked vigorous debate among pension scheme trustees and pension lawyers following the announcement that Cartwright Pension Trusts has advised an unnamed occupational pension scheme client in the UK on allocating 3% of its portfolio into Bitcoin.
Recent discussions have centred around the appropriateness—and legality—of allocating a portion of pension scheme assets to Bitcoin. While concerns about volatility and regulatory uncertainties are valid, I contend that dismissing Bitcoin outright as an unlawful investment is incorrect and overlooks the nuanced role it can play in a diversified portfolio.
Legal Duties of Trustees
Under English law, trustees of occupational pension schemes are bound by their fiduciary duties to act in the best financial interests of beneficiaries, which includes making prudent investment decisions. The key legislation and case law emphasises the importance of diversification and the duty to balance risk and return in the context of the entire portfolio. In particular, the Occupational Pension Schemes (Investment) Regulations 2005 require investments to be made in a manner calculated to ensure the security, quality, liquidity, and profitability of the portfolio as a whole.
Generally speaking, pension scheme trustees have very wide discretion as to the investments they pick. Usually, they have same breadth of powers of investment as any individual. However, they have an obligation under the Pensions Act 1995 to obtain proper advice from FCA regulated investment advisers and they must also consult the pension scheme’s sponsoring employer about investments before they are made.
The Role of Diversification
Diversification is a fundamental principle in pension scheme investment strategy. Allocating a small percentage—say, 3%—of assets to alternative investments like Bitcoin may enhance the risk-return profile of the portfolio. For example, Bitcoin’s performance has historically shown low correlation with traditional asset classes like equities and bonds. This means that Bitcoin can potentially act as a hedge against market downturns, improving the overall resilience of the pension fund.
Bitcoin is supranational and not linked to any fiat currency. That means it is not, for example, subject to the whim of Chancellors of the Exchequer (of all colours) causing spikes in gilt yields and significant collateral calls. That incident led to many pension scheme trustees and their advisers slamming closed the stable door after that particular LDI horse had bolted.
The Pensions Regulator
The Pensions Regulator has not issued any guidance on pension scheme investment in cryptocurrency. It is has certainly not advised against or sought to ban such investments.
The Financial Conduct Authority
The FCA has issued some guidance aimed at non-institutional investors warning of the risks involved in such investments. Even it though has shied away from seeking to ban such investment. It recommends that restricted retail investors, broadly, retail clients who may not have the resources or expertise to absorb significant losses from high-risk investments, should not invest more than 10% of their net investable assets in high-risk assets such as cryptocurrencies.
HMRC
HMRC is not, strictly speaking, a regulator but it has indicated very clearly that it wants taxpayers to declare any gains they make from buying and selling cryptocurrencies and mining activities.
Obviously, investments in cryptocurrencies within an occupational pension scheme are not subject to tax