Viewpoint: How to fix the three ‘mega-gaps’ facing the UK economy

The UK has enjoyed one of the fastest post-pandemic recoveries across advanced economies – yet our economy is one of the worst performing in the G20.

The government has rightly identified that the way we encourage investment over the next five or so years will be central to how quickly we can return to a fast-growing economy, but this must be handled in a careful and strategic manner.

Every decision to incentivise investment must take into consideration the three “mega-gaps” facing our economy: age, carbon and infrastructure.

How the government handles these three key considerations will shape our country for generations to come. We already know, thanks to our 2020 Power of Pensions report, that there exists in this country a £1trn (€1.2trn) infrastructure investment shortfall up to 2030.

While it is encouraging to see that the government has since taken steps to address some of these issues, including through its Levelling Up agenda and the recent Energy Security Strategy, it is clear that a deficit remains.

Insurers and pension funds are ready and eager to assist in this endeavour. But more importantly, we have the experience and expertise to identify the three concerns that will ensure the so-called ‘Investment Big Bang’ is best targeted.

Age

We will soon have an economy with more people over the age of 65 than under 18, leading to an increasing financial burden on those of working age. This will potentially put our already struggling welfare system under greater strain and affect markets and prices for age related products and services.

Additionally, societal divisions along generational lines could be exacerbated, affecting national unity and our ability to collaborate as a community. However, we have the opportunity to rewire the economy so that an ageing population becomes an asset, not a liability.

Carbon

The world’s climate is changing, with the growing evidence further highlighting the increasing number of ways the environmental crisis will impact our lives.

The Met Office recently predicted that we have a 48% chance of breaching the 1.5°C warming threshold set out at COP26 for at least one of the next five years.

It is imperative that every major decision around the UK economy’s outlook be focused on decarbonising homes and businesses, while pushing towards a future of clean and renewable energy.

Infrastructure

Rethinking the UK’s economy requires a seismic shift in the development of the infrastructure that provides our energy, homes, transport, and more. The National Housing Federation and charity Crisis estimate that 145,000 new affordable homes need to be built every year to meet demand – barely a third of that figure, around 45,000 homes, was delivered in 2020/21.

Creating the conditions to enable both public and private funding of large infrastructure projects will allow the next generation to contribute fully to the economy and build the foundations for growth.

At Legal & General, Inclusive Capitalism is a business priority; a mindset that prioritises improving lives and boosting the economy from the ground up. We believe this is a model that works for the good of the country and can tackle all three of these mega-gaps.

The pensions sector, with its ability to direct the finances of the UK’s ageing population, is perfectly placed to implement this.

We need to create a virtuous circle whereby older savers finance sustainable infrastructure projects that boost productivity, jobs and tax income, at the same as delivering potentially higher returns for their retirement.

In the pension sector, the fast-growing Pension Risk Transfer (PRT) market can play a key part in making up a substantial portion of the £1trn investment gap. Of the c. £2trn pool of assets currently in defined benefit (DB) pensions, we predict that up to £190bn could be used in funding for infrastructure projects in the next decade, freeing up nearly a fifth of the required capital for reinvestment.

This opportunity can be maximised further by reforming the way insurers are able to invest in longer-term infrastructure projects.

The government’s ongoing consultation on Solvency II is looking at the possibilities of doing just that, by enabling insurers to unleash billions for reinvestment; up to £95bn according to the ABI.

We welcome this consultation and hope that the sector will support the government in finding the best solution.

Investing more in green, sustainable infrastructure projects, will provide green jobs, help level up the economy, and boost long-term GDP and the government’s tax receipts, while insurers can reward pension holders by boosting their returns, diversifying risk and securing their pension income.

Difficult times lie ahead for the UK economy, with no clear end in sight, but we can develop a strategy to put us in the best position for success. Planting the seeds of long-term growth now by focusing on age, carbon and infrastructure is how we can ensure our economy gets back on track.