With the opening of the Pensions and Lifetime Savings Association (PLSA) investment conference in Edinburgh, the pensions trade body has set out some ways to boost greater pension fund investment in assets to drive UK growth.
This is timely, given calls from many quarters – particularly the government – for pension funds to play a bigger role in providing capital to support economic growth, through investment in infrastructure, private markets and venture capital.
There is a considerable pot to exploit with UK pension funds investing almost £1trn domestically through a mixture of investments.
In Pensions & Growth: A paper by the PLSA on supporting pension investment in the UK, launched to tie-in with the conference, the PLSA put forward a number of practical issues to make UK assets more appealing to pension funds.
The paper starts from the basic, but necessary, premise that different types of pension fund have different investment needs. “Their needs are often based on whether they are DB or DC schemes, whether they are open or closed to new members, and their scale,” said the paper.
It also notes that this is a changing landscape with the amount of investment capital available increasing. The volume of assets in DC pension schemes is expected to double to around £1trn and the value of assets in local government pension schemes is forecast to increase up to around £500bn.
The value of private sector DB pension funds is expected to stay the same at today’s high value (£1.5trn) as most are closed to new members and future accrual, although as many as 500 schemes, managing assets of around £300bn, remain open.
Investment opportunities
The PLSA breaks down the issues to encourage all types of pension funds to invest further in UK growth with easy-to-understand subject headers to set out its case.
The first – Suitable UK Investment Opportunities – is essential to establish a “rich, and continuous pipeline of enterprises needing investment for providers to bring to market and investors to choose from,” the PLSA noted.
The strong insinuation being that this is not always the case. The PLSA is not alone here – it is an assertion that has been repeated throughout the pensions and investment world.
The asset management industry also has a role to play and should be ‘encouraged’ to focus on sourcing UK opportunities and developing new investment funds and products – such as long-term asset funds – which are ‘appropriate’ to pension fund needs, noted the report.
In addition, the British Business Bank should be given an ‘extended scope’ to support companies that ‘need scale-up capital’, and to create or partner with funds that can bundle up the assets in a form that would be suitable for pension funds.
The PLSA then raises the issue of ‘fiscal incentives’ within the investment debate, citing initiatives like the Long-term Investment for Technology and Science (LIFTS), which alter the risk-return component of an investment, and are appealing to pension funds provided the financial support from government is of a long-term nature.
In essence, enhancing the tax treatment of domestic investments, as occurs in France and Australia, ‘merits exploration’, says the PLSA.
The PLSA then points to what it calls ‘policy certainty’. Here the trade body says setting out a clear plan for the future of the UK economy, for example on the green transition, will help draw pension fund investment and allow the UK to compete with non-domestic assets.
Again, the suggestion seems to lean to a view that the government does not always provide the most consistent policy agendas. Three prime ministers in as many months last year supports this view.
Then the PLSA addresses what it calls ‘scale in DC products’. The quickest route to achieving volume and scale, the PLSA suggests is by using fund of fund investment vehicles, by, for example, including a mixture of lower risk growth assets, with some higher risk venture assets, to produce a more balanced investment, rather than further speeding up consolidation of DC.
Although DC consolidation is already happening, due to market pressures as large master trusts compete for business, and regulatory interventions from the Department for Work and Pensions and The Pensions Regulator (TPR) pushing the smallest schemes to consolidate if they cannot demonstrate value for money.
LGPS: Cautious outlook
The PLSA also addresses measures specific to the Local Government Pension Scheme (LGPS).
On the LGPS regime, the PLSA’s paper noted that the Scheme Advisory Board’s Good Governance review should be implemented as soon as possible. “The government should work with funds and pools to understand the comparable international governance models to identify and establish best practice.”
And on the drive to achieve greater asset pooling, the PLSA offers a cautious outlook: noting that following the changes to the management of LGPS assets, which involved consolidating from around 90 separate pension funds into eight asset pools, the primary focus “should now be on ensuring the current structures work well via the provision of guidance or regulation to support collaboration between and across funds and pools.”
The message being a steady as you go approach, and one that challenges the government’s March 2025 deadline for LGPS funds to fully move their assets to their respective pool.
Interestingly, the PLSA says that ‘more resource’ is required to ensure the effective operation of the LGPS, including within its supervisory bodies: the Department for Levelling Up, Housing and Communities, the LGPS Schemes Advisory Board SAB and TPR.
Funding and solvency
It also highlights two measures specific to defined benefit funds, the TPR DB Funding Code and Solvency II.
On the first, the PLSA says more flexibility should be given to open DB pension funds than is currently planned in TPR’s DB Funding Code. “Where supported by a strong employer covenant, open DB pension schemes should be able to carry long-term risks as part of their investment strategy, even as they approach maturity.”
On the second, reforms are also needed to the solvency regime for insurers such that it would incentivise them to directly take over more illiquid assets held by pension funds as they approach buy-out.
“The operation of the current market encourages schemes to simplify their asset holdings, providing gilts and cash to the insurer, often incurring a ‘loss’ on their value,” said the report.
Nigel Peaple, the PLSA’s director policy and advocacy, commented: “How pension funds can play a bigger role in providing capital to support growth in the UK economy is an important question, and in our discussions with schemes there is a clear appetite to invest in the UK – where it is in the interests of savers.”
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