UK investors and pension schemes have been urged by the Prime Minister and the Chancellor to ignite an “investment big bang” to help drive the economic recovery from the pandemic towards “an innovative, greener future for the UK”.
An open letter to UK instutional investors published yesterday – signed by both Boris Johnson and Rishi Sunak – calls on institutional investors to channel a greater proportion of their hundreds of billions of pounds of capital in long-term UK assets – such as infrastructure and “pioneering” companies and innovations – to enable pensions savers to access better, greener returns.
It states that, while “there is no right answer” for the amount that should be invested in long-term asset classes, they “strongly believe this is a question that all institutional investors should be considering”.
“It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country,” the letter states.
The letter insists the government is “determined to Build Back Better, uniting and levelling up the country” – citing the Ten Point Plan for a Green Industrial Revolution launched last year – and hails the UK’s “commitment to the green technologies of the future, and British entrepreneurial spirit”.
While stressing that choosing which asset to invest in and how much to invest remains a decision for each individual business, the PM and Chanceller said they wanted to see UK pension savers “benefitting from the fruits of UK ingenuity and enterprise, being given the opportunity to back British success stories, and secure higher returns and better retirements”.
The government is planning to issue the UK’s first green gilt in September to allow institutional investors to fund the government’s vital green commitments, while the Department for Work and Pensions (DWP) is also currently reforming the charge cap for defined contribution pension funds to ensure that they are not penalised for over-performance.
The government also plans to accelerate the consolidation of the pension sector, including through vehicles such as superfunds, and it is reviewing the prudential regulatory regime for the insurance sector (Solvency II). The letter also reveals that the Financial Conduct Authority plans to launch a framework for a new vehicle for long-term investment called the Long-Term Asset Fund in the autumn.
But the letter argues that UK institutional investors are under-represented in owning UK assets, citing estimates that more than 80 per cent of UK defined contribution pension funds’ investments are in mostly listed securities, which represent only 20 per cent of the UK’s assets.
“Whether you are a trustee or manager of a DC or defined benefit [DB] pension fund, running an insurance company or advising investors on their investment strategy, we are challenging you this summer to begin to invest more in long-term UK assets, giving pension savers access to better returns and enabling them to see their funds support an innovative, healthier, greener future for their country,” the letter continues. “We know that this will require a change in mind-set for many investors that won’t happen overnight, but that is why this change needs to start now.”
Net zero pensions
Growing numbers of major pension funds have begun setting net zero targets for their portfolios over the past year or more, but calls have come for the sector as a whole to make the commitment.
David Hayman, campaign director at Make My Money Matter – an initiative set up to push the pensions sector towards net zero – welcomed the joint letter from the PM and Chancellor, and urged investors to put their money towards a greener future.
“It’s promising to see government recognise the power of our pensions in building a better world, but with COP26 on the horizon and the immediate impacts of the climate crisis already being felt by millions across the globe, UK pension funds must ensure that money is directed towards cleaner, greener investments,” he said. “That’s why we’re calling on all pension schemes to listen to their members, and to the science, and commit to robust net zero targets including a 50 per cent reduction in emissions by 2030.”
Pension sector reaction
Responding to the letter, pensions and investment advisory form Lane Clark & Peacock warned the proposed big bang must be “more than just warm words from the government”.
“The trustees of DB pension schemes have long-term responsibilities to pay their members’ pensions well into the future,” said Myles Pink, partner at Lane Clark & Peacock. “As long-term investors of many billions of pounds in capital, trustees are increasingly seeking stable returns from UK businesses and projects that focus on balancing commercial success with long-term sustainability and social responsibility. Trustees are willing to invest for the long-term but need the government to remove the barriers to this type of investment and to help ensure there are suitable projects to invest in.”
Scottish Widows’ head of policy Pete Glancy said the government was right to look to the power of pensions to help Britain recover following the pandemic. “Trillions of pounds are invested in UK pensions, which could make the difference as the country sets its sights on a return to prosperity,” he said. “UK savers will benefit too, as the returns on these long term investments hold the potential to give a much-needed boost to retirement pots.”
“We’ve long campaigned for the UK’s pension savings to be unleashed on the country’s infrastructure and economic initiatives, and it’s promising to see the government acknowledging the obstacles still preventing long-term illiquid investments,” he continued. “We hope this talk turns to action and the government’s call for an investment big bang does not end in a whimper.”
Meanwhile Tom Selby, head of retirement policy at AJ Bell, said investors should remain focused on picking low cost, diversified investments that fit with their goals and appetite for risk. “Johnson and Sunak are clearly banking on retirement investors to deliver an investment big bang and power the UK economy back to health,” he said. “However, just because the PM and chancellor click their fingers doesn’t mean pension investors will flock to illiquid UK investments in their droves. The reality is that pension scheme trustees have a duty to invest members’ hard-earned retirement pots sensibly, considering various factors including risk appetite, cost and, increasingly, impact on the environment.”
A version of this article first appeared at Professional Pensions.