Institutional investors urged to create a “big bang”

12 Aug 2021

The government needs to remove barriers to investment if pension schemes are to heed their call to “seize the moment” and back the UK. Andrew Holt reports.

Boris Johnson has thrown down the gauntlet to institutional investors, challenging them to fall back in love with UK assets and start an “investment big bang” to support the economic recovery.

In a letter to the investment industry, the prime minister and his chancellor, Rishi Sunak, said they want to see UK pension schemes provide capital heat, which would propel Britain’s recovery from Covid and towards long-term growth.

According to the letter, UK institutional investors need to “seize the moment” and use the hundreds of billions of pounds they collectively manage to back assets that often carry a longer-term payback, such as bridges, roads and wind farms.
The letter was written due to Johnson and Sunak’s concern that domestic assets are being ignored by British pension schemes.

“Over 80% of UK defined contribution pension funds’ investments are in mostly listed securities, which represent only 20% of the UK’s assets,” the letter read.

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This rhetoric is supported by the Pensions & Lifetime Savings Association (PLSA). However, the trade body believes that it is the government that needs to act to make this happen by removing barriers to investment.

PLSA chair Richard Butcher said the association supports the government’s ambition to give pension funds a wider opportunity set from which to deliver good outcomes for savers.

“In an era, which has been characterised by low yields and low scheme member contributions, the PLSA and the wider pensions industry have consistently asked for steps to be taken by government and regulators to remove barriers and improve schemes’ access to a broad range of alternative investments, which may suit a pension scheme’s long-term approach,” he added.

The letter states that the government is doing “everything possible — short of mandating more investment in these areas as some have advocated — to encourage a change in mindset and behaviour among institutional investors”.

“The government remains open to addressing further barriers where they are identified,” it added.

This news is welcomed by Butcher. “As the nation looks to build back better, and accelerate the green industrial revolution, the government can play an important role in providing a pipeline of attractive investible opportunities and a regulatory environment that provides institutional investors with access to high quality, value for money products.”

Butcher cited supporting innovation through measures such as the introduction of green gilts and the Long-term Asset Fund – which will play an important role in facilitating capital investment in long-term infrastructure.

“If they can succeed at this there is a real opportunity for a win-win here: an alignment of the national interest with the interest of pension fund savers,” Butcher said.

Diversified strategy

Butcher also noted the wide-ranging nature of the pension fund industry. “It is important to recognise, though, that the UK pensions sector, which looks after over £2trn of assets on behalf of tens of millions of savers is not homogenous.

“Each fund will, by law, have its own prudently managed well diversified investment strategy and an approach designed to suit its members particular needs,” he added. “Above all else, trustees’ primary duty is to look after the saver first.”

Butcher recognised the government’s acceptance here. “It is therefore welcome to also see the prime minister and chancellor acknowledge there is no single ‘right answer’ when it comes to how much pension fund trustees should invest in long term UK assets.

“As long-term owners of capital, pension funds are well-placed to reap the benefits of investing on behalf of savers for the long term and should continue to seek to build portfolios of assets which provide stable cashflows and diversification benefits for the next 15 or even 50 years,” he added.

But Butcher noted the challenge when it comes to alternative investments. “It does however remain the case currently that investing in illiquid and alternative assets can often be more complicated, more costly and more resource intensive.

“Where this is the case, such investments are rightly much less compelling value for money than alternative options, irrespective of their potential upsides.”

Butcher and his colleagues will be working with the government to make this happen. “As part of the Productive Finance Working Group, we and others, have been in discussions with government about overcoming the structural and practical hurdles, so as to improve the availability and so broaden the range of investible products available to trustees,” he said.

“We look forward to continuing to work with the government on this over the summer.”

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