Pensions urged to invest hundreds of billions in UK

Baillie Gifford, Edinburgh

Pension funds in the UK have been urged by prime minister Boris Johnson and finance minister Rishi Sunak to provide an “investment big bang” by unlocking “the hundreds of billions of pounds sitting in UK institutional investors” and investing the money in British infrastructure and illiquid investments.

In an joint open letter to the UK’s institutional investment industry,  Johnson and Sunak said: “Currently global investors, including pension funds from Canada and Australia, are benefitting from the opportunities that UK long term investments afford, while UK institutional investors are under-represented in owning UK assets.

“For example, over eighty per cent of UK defined contribution pension funds’ investments are in mostly listed securities, which represent only twenty percent of the UK’s assets.

“While we are glad that international investors prize UK assets, and are working hard to attract even more inward investment, we also want to see UK pension savers benefitting from the fruits of UK ingenuity and enterprise, being given the opportunity to back British success stories, and secure higher returns and better retirements …

“To seize this moment, we need an Investment Big Bang, to unlock the hundreds of billions of pounds sitting in UK institutional investors and use it to drive the UK’s recovery.

“It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country.

“We recognise the responsibility of the Government to remove obstacles and costs to making long-term, illiquid investments in the UK.

“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, and we remain open to addressing further barriers where they are identified.

“To help with this, our new UK Infrastructure Bank is open for business and is ready to co-invest in green infrastructure and support regional economic growth.

“We will issue the UK’s first Green Gilt in September, allowing institutional investors to fund the Government’s vital green commitments.

“The Department for Work and Pensions is reforming the cap on fees that DC schemes can charge to ensure that they are not penalised for over-performance, as well as accelerating the consolidation of the pension sector, including through vehicles such as superfunds.

“We are reviewing the prudential regulatory regime for the insurance sector (Solvency II), and with the support of the Productive Finance Working Group, the FCA will launch in the autumn a framework for a new vehicle for long-term investment, the Long-Term Asset Fund.

“We are also looking at how we can use the UK-UAE Sovereign Investment Partnership, which will invest £1 billion in UK life sciences as part of its investments into our leading tech sectors, as a model for other UK-anchored investment funds.

“Choosing which assets to invest in to secure the best outcomes remains a matter for pension fund trustees, and other custodians of institutional capital.

“We recognise that there is no single ‘right answer’ for the amount that should be invested in these long-term asset classes.

“Some funds are already highly active; some – for good reason – are not.

“You will know best what is right for your business– whether that is committing to invest a greater proportion of your capital in long-term UK assets, establishing the vehicles to allow others to do so, or providing the necessary specialist advice.

“But we strongly believe this is a question that all institutional investors should be considering.

“Whether you are a trustee or manager of a DC or DB pension fund, running an insurance company or advising investors on their investment strategy, we are challenging you this summer to begin to invest more in long-term UK assets, giving pension savers access to better returns and enabling them to see their funds support an innovative, healthier, greener future for their country.

“We know that this will require a change in mindset for many investors that won’t happen overnight, but that is why this change needs to start now.”

Investment Association CEO Chris Cummings said: “Getting this right will require a new partnership between the regulatory authorities and industry to ensure that pension funds, and retail investors, have access to transparent, well governed funds that return good value for money.”

The Investment Association represents the UK investment management industry and its 250 member firms manage £8.5 trillion of assets.

Tom Selby, head of retirement policy at AJ Bell, said: “Boris Johnson and Rishi Sunak are clearly banking on retirement investors to deliver an ‘investment big bang’ and power the UK economy back to health.

“Given their long-term focus and scale, defined benefit and automatic enrolment pension schemes might seem ideal candidates to support UK companies. There is also more than a whiff of patriotic fervour in this latest drive to ‘Build Back Better’.

“However, just because the PM and Chancellor click their fingers doesn’t mean pension investors will flock to illiquid UK investments in their droves.

“The reality is that pension scheme trustees have a duty to invest members’ hard-earned retirement pots sensibly, considering various factors including risk appetite, cost and, increasingly, impact on the environment …

“Institutional investors also need to prioritise diversification when choosing how to put members’ money to work, both in terms of the type of company they invest in and the country in which it resides.

“Ultimately, the main job of pension schemes is to invest in a way that maximises returns for their members, not in the way the Prime Minister tells them to.

“While the focus here is on institutional money, retail investors should also think very carefully before piling into illiquid UK assets.

“Such assets may offer growth opportunities but can come with extra risks.

“This was most famously demonstrated in the collapse of Woodford Investment Management, which backed illiquid start-up companies and ended up unable to sell them quick enough to get cash to investors.

“Of course illiquid investments can be perfectly appropriate, but should only be considered if they fit with your retirement goals and risk appetite.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.