The Pensions and Lifetime Savings Association has identified funding gaps in the UK economy which present ‘investment opportunities’ for DC pension schemes.
In a new report, the PLSA is urging the government to take action on a number of fronts, to ensure there is a pipeline of investment opportunities for UK pension schemes.
The report, Pensions & Growth: Creating a Pipeline of Investable UK Opportunities also sets out steps that trustees and schemes need to take to make the most of these investment opportunities, while also continuing to meet fiduciary duties.
This report follow debate — from both the previous and current government — as to how pension funds can be supported to allocate more of their assets to emerging, but higher risk, sectors that could drive UK economic growth. This primarily involves investment into private markets and illiquid assets, including infrastructure, private equity and private credit.
This latest report from the PLSA identifies a funding gap in four key areas that most require investment.
- Climate change: In the UK, the Climate Change Committee’s sixth carbon budget estimated that reaching net zero will cost around £50 billion a year.
- Infrastructure: Analysis of the National Infrastructure and Construction Pipeline identifies a need for private investment in infrastructure between now and 2032/33. For example, energy sector investment of £33 billion.
- Social and community growth funds: in social housing research shows the sector will require an average of £14.6 billion in capital grant from the Government each year between 2021-2031, to leverage enough private capital for a housebuilding programme worth a total of £46.2 billion per year on average.
- Life sciences and AI: in these areas improvements to the investment ecosystem are required. With AI predicted to generate an additional £32 billion of revenue by 2030, there is substantial scope for expansion if the UK can incentivise it.
It points out that, pensions funds have a fiduciary duty and will only invest where the risk-return characteristics of potential investments meet the needs of their members.
But it says that with action from government, pension funds, investment managers, investee companies and consultants, there is the potential to open the pipeline of assets to attract the investment of pension funds to support UK growth.
In light of this the PLSA is recommending that trustees and pension funds should be looking to address the following issues:
- Develop investment strategies that consider how to allocate to private market assets appropriately to meet the needs of the 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.
It is also calling on the government to take the following steps to crease the environment that will support DC investment into private markets.
- 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.
- Offer targeted fiscal incentives to make UK growth assets more attractive than competing assets from other countries. The PLSA says enhancing the tax treatment of domestic investments, as they do in France and Australia, merits further exploration.
- Expand the area of focus beyond private equity and venture capital to encompass infrastructure, alternative assets and a variety of funding models.
- Take control in bringing key industry groups together to develop solutions to growth challenges.
- Produce a plan for the development of skills to achieve growth.
- Lead and collaborate on AI and net zero at international scale.
- Continue to work closely with regulators and others to get the right approach to investment risk, including DC, open DB and the LGPS, where this is in the interest of scheme members.
- Deliver planning reform to enable crucial energy, infrastructure, social housing and later life care development
PLSA director policy & advocacy Nigel Peaple says : “The UK has considerable need of greater investment to achieve the Government’s goals on growth and the transition to net zero.
“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. The PLSA has highlighted these issues in our conferences, supports the Mansion House Compact, provided input to the National Wealth Fund, and last year identified the policy and regulatory changes needed to achieve this goal.
“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.”