Pension funds balk at using number 10 to fuel UK investment boom

The UK government’s ambition to fuel a post-Covid ‘Big Bang of investment’ with billions of pounds in pension funds is likely to run out of steam after pension funds balked at Downing Street’s call to invest more money in projects.

With public finances strained by the pandemic, the Prime Minister and Chancellor last month challenged UK pension funds and asset managers, which hold £ 1bn in assets, to use their funds to support an “innovative, healthier and greener future for their country”.

But a Financial Times survey of private and public sector pension plans and pension fund managers suggests the appeal is not generating widespread support, amid concerns about cost and complexity.

A senior executive with a large pension plan said the government push “threatened to come in with a whimper more than a Big Bang.”

“They can’t suddenly force people to turn on the [cash] tap, ”a senior executive of a large asset manager told FT.

The FT received responses from 22 funds and managers who together hold more than £ 700 billion in assets and have tens of millions of policyholders and pension clients.

The unease was greatest over a patriotic call to invest more nationally, including in infrastructure projects, such as bridges, social housing and renewable energy, and in private equity and private equity. risk, both motivated by government “build back better” and “leveling up” strategies.

“We are a global investor and have a fiduciary duty to invest in assets which best match our investment objectives, regardless of geography,” said the £ 57 billion British Telecom Pension Scheme.

“BTPS has always been a major investor in the UK. . . but as a large pension plan, if the right opportunities weren’t available here, we would invest elsewhere. “

Abrdn, the UK asset manager formerly known as Standard Life Aberdeen, which has £ 475 billion in assets, said he would invest in the UK if it “made sense”.

“The first question I ask is not ‘Is this going to rebuild better, or is this level going to rise?'” Said Neil Slater, global head of real assets at Abrdn. “The first question I ask is: Does this make sense for my clients? ”

Most pension fund portfolios are dominated by stocks and corporate bonds.

Local government pension plans are already big investors in the types of assets the government wants more support for, but some have said the government’s strategy will not influence investment decisions.

“The type of opportunities mentioned by the government in the letter to the pension plans would be viewed the same as any other – that is, does it fit the strategy and does it provide the risk characteristics / return that the fund seeks, ”said Jeff Houston, secretary of the Local Government Pension Plan advisory board.

The so-called illiquid assets that the government encourages are more generally held in defined benefit plans, which have secure retirement promises to keep. They are less common in defined contribution plans, where no promises are made on retirement income levels, due to fee caps on member contributions and trustees’ concerns about complexity and liquidity.

Scottish Widows, whose flagship DC default pension fund has £ 40bn in assets, explores illiquid investments, believing they have clear investment benefits, but added: “These strategies have a cost – they are charged at a premium in public markets and are also complex.

“In order for us to make these investments on behalf of our clients, we have to weigh the pros and cons, which takes time and the right expertise.

Aegon, with £ 47 billion under management, said: “Our main objective is to maximize the cost / risk / return profile of our default funds. Any decision to invest in illiquid assets, including asset classes and ownership percentages, would be made with due regard to this objective and would require careful analysis before being implemented.

Some funds criticized the government’s initiative more openly.

“We don’t think the UK government should play a role in guiding the allocation of retirement assets,” said PensionBee, which manages around £ 2 billion in retirement savings.

Many survey respondents said the government could do more to encourage investment in alternative assets by offering incentives such as taking riskier investments, for example in start-ups.

The £ 80 billion university pension scheme has said that to maximize the success of the Big Bang initiative “it will be important for the government to ensure predictable, transparent and stable regulation of infrastructure assets”.

Some pension plans are backing the government’s action, including Nest, the £ 20bn public pension fund, which recently announced its ambition to develop a private equity allocation of £ 1.5bn, or 5% of its assets, by 2024.

Phoenix, the UK’s largest long-term savings and retirement firm, with £ 300 billion in assets, is also publicly supportive.

“We have no choice but to invest more in illiquid assets, albeit with the right risk profile,” said Mike Eakins, chief investment officer at Phoenix Group.

“Yields on corporate and government bonds have been reduced to such a level that it is impossible for us to meet our obligations to our policyholders or pension clients by simply limiting the investment universe to gilts and corporate bonds. “

The government said: ‘Global investors are benefiting from the fruits of British ingenuity and enterprise, and we also want UK pension savers to have the opportunity to support UK successes, to access better returns and support an innovative, healthier and greener future for their country. “