The Government has run a series of initiatives designed to ensure that more pension scheme money is used to fund major projects and in support of government agendas such as ‘levelling up’ more deprived parts of the country and helping to deliver on the government’s ‘Net Zero’ agenda.
These include:
- A letter from the (then) Prime Minister and Chancellor in August 2021 calling on institutional investors to launch an investment ‘big bang’ to boost Britain’s long-term growth. The letter says:
“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….…we want 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”.
Prime Minister and Chancellor challenge UK investors to create an ‘Investment Big Bang’ in Britain
- The creation of a ‘Long-term Asset Fund’ regime. The FCA says:
“Investment in long-term illiquid assets could yield good long-term outcomes for investors and is important for economic growth and the creation of jobs. The introduction of the LTAF should help facilitate an environment where investors that wish to invest in productive finance assets can do so”.
PS21/14: A new authorised fund regime for investing in long term assets | FCA
- Changes announced in the 2022 ‘Growth Plan’ which will relax the charge cap on Defined Contribution pension schemes used for automatic enrolment
“giving defined contribution pension schemes the clarity and flexibility to invest in the UK’s most innovative businesses and productive assets creating opportunities to deliver higher returns for savers”
The Growth Plan 2022: documents
The large majority of UK pension assets are however held by Defined Benefit pension schemes. As at Q1 2022, out of £2.76 trillion held in funded occupational pension schemes, around £2.02 trillion was held by private sector DB schemes and a further £0.5 trillion by funded public sector DB schemes (primarily local government). This means that the success of the Government’s drive to get more pension fund money invested in illiquids will depend fundamentally on the decisions made by DB pension schemes.
However, recent market turmoil has led private sector schemes to attach much greater weight to access to liquid assets to provide greater financial stability in the event of market turmoil.
Whilst illiquid investments – by their very nature – cannot easily be disposed of, it is likely that over time schemes will look to reduce their holdings of such investments and will be more reluctant about entering into new long-term commitments. This will make it much harder for the Government to secure the level of investment it seeks from this sector as part of its ‘growth agenda’.
These constraints will be less relevant to some types of DB pensions, with local government schemes and open DB schemes, for example, still likely to see a role for infrastructure investment, but these two categories only account for a minority of all DB pension assets.
Commenting, Steve Webb, partner at LCP said: “Cash-strapped governments see pension funds as a key way of raising the finance for long-term infrastructure projects designed to deliver on Net Zero goals and other government objectives. But the current drive for liquidity amongst DB pension schemes could seriously undermine the push for investment in illiquids. Where schemes are now targeting higher levels of liquidity they are likely to review the long-term assets they already hold and be more wary about taking on new commitments. The Government may need to work much harder to persuade pension funds that investing in illiquids should be a priority at the moment”.
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