Viewpoint: Pension funds must be at the centre of the UK investment debate

The new UK government has made clean power by 2030 one of its defining missions. It wants to work with the private sector to double onshore wind, triple solar power, and quadruple offshore wind over the next six years. Emerging net zero technologies and industries, like carbon capture and storage and hydrogen, will also need to expand.

This will require significant investment – in the order of tens of billions of pounds annually, according to estimates from the independent Climate Change Committee (CCC). The government expects pension funds – local and global – to play a major role here and is committed to consolidating UK pension provision to drive greater investment in these assets.

But what of the supply side? Mobilising pension capital for net zero: a policy blueprint for the UK is a collaboration by a dozen of the UK’s and Australia’s leading pension funds, pension fund owned investors, and the Pensions and Lifetime Savings Association (PLSA), which seeks to address this question.

Collectively, the signatories to this blueprint represent £1.7trn (€2trn) in pension savings invested on behalf of more than 30 million workers in the UK and more than 10 million workers in Australia. Many are already major investors in the infrastructure of each country.

The blueprint’s 20-point plan seeks an active and coordinated approach by government, investors and industries across planning, climate, energy, fiscal and industrial decarbonisation policy.

We believe these policy settings can help unlock further investment in the UK’s net zero transition, drive economic growth and deliver appropriate risk-adjusted returns on workers’ retirement savings.

The objective is a pipeline of investable projects in which pension capital can participate in line with their fiduciary duty to members. The recent government decisions on permitting major solar, the reversing of the presumption against onshore wind, and the financing of carbon capture and storage all bode well.

But things get harder from here. Long-term net zero delivery success demands a pro-investment, co-investment mindset from all sides.

Our recommendations are led by the call for the government to take a long-term approach with respect to energy transition investments. As things stand, its two new major finance institutions, the National Wealth Fund (NWF) and Great British Energy (GBE), are heavily disincentivised from taking stakes in greenfield energy transition projects. This is because the UK’s current debt rules (Public Sector Net Debt metric) do not assign any asset value to illiquid assets, only a liability (the cost of the purchase).

Given the government wants to see the taxpayer benefit from a share in successful green projects, this rule change seems imperative. That the UK state currently treats a pound spent acquiring productive assets the same way as a pound lost down the back of the sofa, does not seem sustainable – to pardon a pun.

The government – we think — should think about its own present and future assets more like a long-term investor and less like a commercial bank holding equity as loan collateral to be sold in a fire sale.

Such an approach will encourage the co-investments which will be an important part of energy transition finance. This space is – naturally – still taking shape but the report also recommends that the NWF be designed to support the commercial development of higher risk net zero industries and projects, where it can play a valuable role bridging gaps in capital markets.

There is a risk that much of its budget is allocated to sectors like steel where it is likely grants rather than co-investments or debt financing will be necessary.

The report also looks forward to clarity as legislation proceeds through parliament, on the relationship between GBE, the Crown Estate and private capital. Pension funds investment can play a role here, as it has already in the wind sector, but the allocation of risk and reward will be critical.

Likewise, we see real value in streamlining the permitting process for repowering onshore wind sites, using the latest technology to upgrade existing wind farms and increase renewable energy production. And the blueprint also recommends the government consider extending Contracts for Difference terms for new renewable and low carbon power generation beyond 15 years to reflect longer project lives as technology improves, to unlock a lower cost of capital.

There are many more detailed, technical recommendations. But the blueprint’s broader aim is to deepen dialogue between government and pension capital on the financing of the energy transition. After all net zero will be reached project-by-project, sector-by-sector over the next 25 years.

Gregg McClymont is executive director - public affairs Europe at IFM Investors