The Government’s aim of reviving the once-strong UK domestic investment base to support our businesses and invest in long-term growth projects to benefit Britain is absolutely right. This can help achieve better pensions, higher sustainable growth, revived financial markets and ensure a stronger economy for future retirees to live in.
The Government has secured agreement from many of the largest UK pension schemes, to voluntarily invest 10 per cent of their assets in private markets by 2030, and half of that should be in Britain. The commitment includes more direct investment in the economy, including alternative energy infrastructure and small start-up companies in science and technology.
This is an improvement on the original Mansion House agreement, which did not require even a penny to be put into domestic assets. Other countries, such as Australia, see their pension funds invest far more in their own domestic economies than UK funds do and I fully support the idea of encouraging more of our pension money to be invested to boost Britain, rather than just being used to help other markets rather than our own.
Other countries’ pension funds also invest far more in unquoted securities, which in the past have produced some very strong returns in recent decades. The Government believes our own funds can achieve better long-term returns by emulating that approach. However, I do have some concerns that this overlooks the opportunities in public markets too and adds a whole new level of risk.
Unlisted assets have much higher costs and risks. As as result it will be important that schemes take note of the additional risks involved in private markets, including the liquidity risks of small firms and infrastructure projects. The Government needs to ensure these funds have access to a diversified range of investments, so they spread the risks across many different areas of the economy. The upcoming final report of the Pensions Investment Review should clarify what the Government proposes to do, to help this initiative. There has been much talk of establishing Long-Term Asset Funds (LTAFs) to provide pension funds with investment vehicles for illiquid and unquoted assets, but there are dangers in the open-ended structure that may be used.
Pension funds should also look at closed-ended UK listed investment companies already investing in energy and infrastructure. Closed-ended investment companies could provide a ready-made mechanism for many pension funds to invest more in infrastructure, housing, clean energy and small businesses. These investment trusts have expert management, long-term time horizons and diversified portfolios, often offering a high yield too. Ensuring Regulations do not keep hampering this sector is important for the growth agenda and relying only on open-ended funds could add further liquidity risks.
Private capital is a specialist high cost, high risk area of investment. And, UK quoted equities are exceptionally cheap in many cases, both in an international and historical comparison, due partly to pension funds reducing their UK exposure. So I think there is also a good case to suggest that pension funds should use their Mansion House money to increase exposure to listed smaller companies, including on AIM, which are currently languishing at low ratings, rather than just private assets.
Harnessing the power of pension assets is long overdue. There are huge flows of money into pensions each year and £3 trillion of pension assets are already set aside for retirement. The Government’s aim of reviving the once-strong domestic investment base to support British markets and invest in long-term growth projects that will benefit this country is absolutely right. This can help achieve better pensions, higher sustainable growth and ensure a stronger economy for future retirees to live in. Especially as Government finances preclude major state-funded investments in infrastructure and early-stage companies, pension funds could be harnessed to fill the gap and return our country to its formerly-leading global market position, with a more successful and competitive investment environment and a better economic landscape for future pensioners.
