With the government looking to reinvigorate the UK and stimulate growth, the Pensions and Lifetime Savings Association (PLSA) has put forward several recommendations to create the necessary investment conditions for pension schemes to allocate a greater portion of their assets to growth areas.
In July 2023, the then chancellor of the exchequer Jeremy Hunt announced plans to unlock up to £75bn of additional investment from defined contribution (DC) and Local Government Pension Schemes (LGPS) to help grow the UK economy and deliver benefits to savers.
The proposals included encouraging DC pension funds to invest 5% of their default funds in unlisted equities by 2030; creating a new regime for defined benefit (DB) consolidation vehicles, or superfunds, to create much-needed scale in the UK DB sector; a proposal to allow the Pension Protection Fund (PPF) to act as a consolidation vehicle; improving engagement, information and value for members; and boosting consolidation in the LGPS.
A report published by PLSA today, Pensions and growth: Creating a pipeline of investable UK opportunities, identifies a funding gap amounting to tens of billions of pounds across four key areas which most require investment. This includes climate change, infrastructure, social and community growth funds, and life sciences and artificial intelligence (AI).
The steps that are needed to be taken in order to make these assets more investable vary by sector.
For example, investment in wind, solar and nuclear power would support decarbonisation and lead to estimated operational savings of £50bn by 2050. To make these assets more investable the government would need to introduce planning reform and grid-connection rule reforms, revise incentive policy and develop skills to speed up heat pump installation, among others.
The PLSA also set out ways to make assets more investable across other sectors, including heat and buildings; later-life housing and social care; social housing; transport; and AI.
The association stressed that pension funds have a fiduciary duty and will only invest where the risk-return characteristics of potential investment meet the needs of their members.
However, it added that with government, pension funds, investment managers, investee companies and consultants all playing their part, there is a substantial potential to open up the pipeline of assets to attract the investment of pension funds to support UK growth.
It said that to achieve this outcome, trustees and pension funds should:
- develop investment strategies that consider how to allocate to private market assets appropriately to meet the needs of their scheme and future liabilities;
- be aware that training may be required to ensure there is an appropriate level of knowledge and understanding of social and climate issues and how to integrate these into investment decisions;
- encourage advisers and consultants to further consider growth assets in investment strategies put forward for DB and DC schemes, and consider any gaps in service provider expertise;
- understand the risks involved in different types of investments and how to effectively diversify their portfolio, including clarifying fiduciary duty so trustees are clear that climate considerations can be compatible with their fiduciary duty;
- ensure Statements of Investment Principles clearly articulate trustee views on which investment sectors to prioritise;
- consider what blended finance structures would make sectors more investable.
The PLSA also called on the government to provide policy and regulatory certainty to improve the UK’s appeal versus investment opportunities globally. This includes developing a long-term strategy for investment and growth, outlining the government’s priority investment sectors, its approach to blended finance and how it will work with the pensions industry.
The association said that government should also offer targeted fiscal incentives to make UK growth assets more attractive than competing assets from other countries. In addition, initiatives such as Long-term Investment For Technology and Science ( LIFTS), which support investment in UK start-ups and companies requiring late-stage growth capital, should also be considered.
It added that the government should expand the areas of focus beyond private equity and venture capital to encompass infrastructure, alternative assets and a variety of funding models.
The PLSA said that the UK government should also produce a skill development plan to achieve growth and lead and collaborate on AI and net zero at an international scale.
The government should also take control in bringing key industry groups together to develop solutions and continue to work closely with regulators to get the right approach to investment risk, including DC, open DB and the LGPS.
Lastly, it said the government needs to deliver planning reform to enable crucial energy, infrastructure, social housing and later-life care development.
Nigel Peaple, director for policy and advocacy at the PLSA, said: “The UK has considerable need of greater investment to achieve the government’s goals on growth and the transition to net zero.”
He said that pension funds have an important part to play in achieving greater investment in the UK where this is consistent with achieving the right returns for pension savers.
“Our new report looks at how to create more investible opportunities in the UK by identifying the pension fund and government actions needed and calls on all parties to work together to achieve these goals.”
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