The UK government is looking at pension schemes and their assets to boost the UK economy through investment in productive assets, however it is currently overlooking life insurers who could invest up to £100-200bn in productive assets over the next 10 years.
In July 2023, Jeremy Hunt announced a number of measures to unlock up to £75bn of additional investment from UK pension schemes worth over £2.5trn.
These measures, according to Hunt, aimed to secure the “best possible outcomes for pension savers” while prioritising a “strong and diversified Gilts market” and strengthening the UK’s competitive position “as a leading financial centre”.
Over the last year, the government, both previous and new, continued to focus on unlocking the investment from pension funds into UK productive assets.
However, according to a recent paper from DLA Piper suggests the government is overlooking a key player – UK life insurers.
DLA Piper surveyed four UK-based life insurers with a combined £196.9bn bulk purchase annuity (BPA)-related back book and an average of 59% of this was invested in UK-based assets.
It said: “The sheer scale and volume of these figures confirms that insurers are already actively investing in UK productive finance and other UK-based assets within the existing regulatory landscape.”
Outside of the DLA’s paper, LCP said that circa £310bn of pension assets have so far been transferred to insurers since 2007.
This number continues to grow as BPA transactions continue to reach record levels year on year. Just this year, the BPA market is expected to see £40-50bn transferred to insurers.
Appetite
Insurers seem to have an appetite for further investment in productive assets.
Nenna Gilmour-Platt, head of investment strategy at Just Group, told IPE that more than 50% of its portfolio is UK-based or invested in UK issuers.
She said: “We have a particular interest in projects that support our social objectives such as health and care facilities and affordable housing.”
She added that insurers are already heavily engaged in investing in the UK and actively looking for good quality opportunities.
Gilmour-Platt pointed out that insurers have pledged to invest £100bn into productive assets over the next decade.
“There are clear practical advantages – stable regulation, enforceable terms, lack of exchange rate risk, the high level of investment expertise. There are also good reasons to invest abroad too, such as diversification and the potential of higher growth economies. Given a similar opportunity here or abroad, we would usually choose to stay close to home but wherever we see a compelling opportunity we will be interested,” she noted.
Some of the most notable investments from Just Group, as highlighted in DLA Piper’s paper, include a £109m investment in 88 facilities providing specialist care for children and adults with acute care needs, with another £33m in a further 33 facilities.
Just Group has also invested £30m in the construction of a new multi-purpose healthcare service facility to be operated by University Hospital Southampton NHS Foundation Trust.
However, according to Hayley Rees, managing director of PIC Capital, investment in productive assets by insurers over the next decade could be as high as £200bn.
She said that the Pension Insurance Corporation (PIC) already invests £13bn in what it defines as sustainable assets, and will continue to do so.
Some notable investments from PIC, highlighted in DLA Piper’s paper, include £50m in Portsmouth Water in 2023 to finance the Havant Thicket Reservoir, which was the first reservoir to be built in the UK since the 1990s, which will address water resource challenges across the South-East and protect rare chalk streams in Hampshire.
PIC also invested £200m in 2023 to fund the development of a build-to-rent development on a brownfield site in central Birmingham, with the aim of creating 667 new apartments, providing 300 jobs during construction, as well as the establishment of a new student academy to provide training and work placements on the construction site.
But Rees said that insurers have to make sure that what they are investing in is “suitable for our balance sheet and our regulation and risk/reward is in the right place”.
Andrew Kail, chief executive officer of institutional retirement at Legal & General, agreed that while the insurer “definitely” has appetite to invest more in productive assets, “it has to work for us”.
Kail said that 40% of assets on L&G’s portfolio are illiquid assets.
Some notable investments for L&G, as highlighted in DLA Piper’s paper, include a £122m investment in 2024 acquiring multiple student accommodation properties in Exeter and Glasgow, making it the first direct-led UK student housing acquisition. The insurer also funded a new prime logistics base in Magna Park in Corby that will be let to Nike on a 20-year lease.
According to Kail, insurers are well placed for investment in productive finance because of their scale.
He pointed out that insurers are “effectively a pooling vehicle”. He explained: “Taking on pension schemes gives us a much bigger balance sheet than the average pension scheme, and therefore that gives us a scale to invest and, subject to it being permissible under our solitude regulatory rules, we are seeking long-duration assets to support the long-duration liabilities we’ve got.”
Kail added that pension schemes, even the large ones, often won’t have the scale and expertise to invest in productive assets.
“They can access the real estate market or the infrastructure market if they want, but that would typically be by an investment margin fund. It wouldn’t be direct.
“When you get to the size and scale of someone like L&G, we can afford to fund a £300m build of blocks of flats in Cardiff if that’s something we choose to do. We have got a £90bn balance sheet [to work with].”
He added that because L&G is able to invest using its asset management arm “there is no leakage” and therefore is more economical to do it that way and the investment stays within the company.
Barriers
There are certainly barriers to consider that prevent insurers from reaching their maximum investment capacity in the UK.
According to the DLA Piper paper, the most cited barrier was the lack of market opportunities to satisfy investor demand. Contributing factors to poor market opportunities include:
- The UK borrowing market is dominated by big banks, leading to finance terms being structured to suit the requirements of these banks. It was noted that this issue is less pronounced in other markets, such as the US.
- Planning restrictions and cross-cutting regulatory issues increase costs, which are all ultimately passed to investors. Overruns and overbudget project completions are regular occurrences.
- Local authorities have a lack of planning capacity and squeezed budgets.
- The UK’s recent high inflation (particularly on construction costs) and high interest rates have impacted returns on productive finance assets relative to alternatives such as corporate bonds.
- Some public sector entities crowd out institutional investors.
Gilmour-Plait said: “Unlocking planning is a key step towards encouraging more investment.”
“Unlocking planning is a key step towards encouraging more investment”
Nenna Gilmour-Platt, head of investment strategy at Just Group
She pointed out that overseas projects are often more attractive simply because of more efficient planning systems.
She said: “Uncertainty around planning impacts many types of projects ranging from energy and transport infrastructure, housing and commercial developments such as science parks. Some projects seeking financing can take years to deliver returns during which the economic and interest rate environment changes.”
Gilmour-Plait added that typically, insurers have only been able to get involved in the later stages of construction or infrastructure projects, but the Prudential Regulation Authority is making it easier for insurers to get involved at an earlier stage by making changes to the Solvency UK regime to relax requirements to have fixed cash flows from day one, which she said “will be a big help”.
Consistency
One thing that would help, according to Kail, is consistency. “We’ve just changed governments, but even within government priorities change and therefore there are some issues that are almost fundamentally important and pensions is one of them.”
He said: “They transcend a five-year government – five years is a very short amount of time to do real transformation. Unless you get continuity of political support then all these long-term projects are very challenging.”
Kail added that there is an opportunity for governments to make long-term plans on a cross-party basis that are supported. However, he admitted that this is very difficult to do.
“How do you get the political will and momentum and the regulatory backing? This is really important for companies like us because businesses look for certainty and long-term thinking,” he said.
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