A group of UK and Australian pension funds that manage £1.7 trillion are recommending carefully targeted policy action to unlock pension capital in order to contribute to the new UK government delivering on its clean power by 2030 mission.
The funds’ blueprint called “Mobilising pension capital for net zero: a policy blueprint for the UK” is a first-time collaboration between Australian and UK pension funds and the UK pensions trade association, Pensions and Lifetime Savings Association (PLSA).
The development of the blueprint has been led by pension fund-owned asset manager IFM Investors.
The pension funds are asking the UK government to change rules determining how public debt is measured to encourage more investment in green developments.
The funds argue the UK needs a new definition of public sector net debt so that it takes into account the net worth of illiquid infrastructure investments.
The blueprint was launched at Westminster at a roundtable event featuring the Chief Investment Officers of some of the UK’s biggest pension funds and government representatives.
“The new UK Government has made clean power by 2030 one of its defining priorities – and wants to work with private sector investors to double onshore wind, triple solar power and quadruple offshore wind over the next six years,” said the group of pension funds in a statement.
“The Government expects pension funds, both local and globally, to play a major role in financing the wider transition.
“Funds meanwhile, have a legal duty to prioritise the interests of pension scheme members, and need the right policy settings in place to facilitate their investment.
“The key recommendation is to reform Public Sector Net Debt (PSND), by including the net worth of illiquid infrastructure investments for the first time, and comes against a backdrop of growing debate about the role of the UK’s fiscal rules in supporting capital investment – and the design of the new government’s flagship finance institutions, Great British Energy (GBE) and the National Wealth Fund (NWF).
“Reforming the fiscal rules to treat unlisted productive assets as an asset will help incentivise long-term public investment in the net zero transition, creating the conditions for NWF and GBE to crowd in pension capital at scale.”
The group of signatories to the blueprint includes its largest Local Government Pension Scheme pool, Border to Coast, and the UK’s largest defined contribution fund, Nest, as well as LGPS Central and the North East Scotland Pension Fund.
From Australia, Aware Super, CareSuper, Cbus Super, HESTA, Hostplus and Rest are signatories.
Last year, IFM signed a Memorandum of Understanding with the UK Government to invest £10 billion into infrastructure projects by 2027 and is a founding member of the government’s British Infrastructure Council.
Gregg McClymont, Executive Director, IFM Investors, said: “Mobilising pension fund investment has the potential to create benefits for society, but quite rightly, pension funds have a fiduciary duty and must only invest in their members’ best interests.”
“This world-first collaboration between some of the UK and Australia’s largest funds maps out how the Government can accelerate the energy transition and deliver strong returns for working peoples’ retirement savings.”
“There are a number of steps to unlocking this investment. But a pre-requisite is that the Government should account for infrastructure assets more like a long-term investor, and less like a commercial bank holding equity as loan collateral to be sold in a fire sale.”
Elizabeth Fernando, CIO, Nest, said: “Nest members represent a third of the UK workforce, so why wouldn’t we want to make great returns and invest in their communities and the infrastructure they rely on? As one of the world’s largest economies and a global leader in the transition to net zero, the UK presents significant opportunities for green investment.
“We already have hundreds of millions of pounds invested in solar and offshore wind farms across the country, and we welcome discussions on how a scheme like Nest can further support the UK’s green transition.”
Carol Young, GCEO and National Wealth Fund taskforce member, USS, said: “We’re delighted to be involved with this important blueprint and its recommendations to Government. Used well, the policy options offer the opportunity of better aligning pension scheme interests and capital with the Government’s net zero ambitions.”
Graham Buntain, Investment Manager, North East Scotland Pension Fund, said: “NESPF is fully supportive of the recommendations within this UK Energy Transition blueprint, as we recognise the need to support the decarbonisation of the UK economy.
“With the right approach and policies, collectively we can ensure suitable returns and provide the accelerated stimulus required towards Net Zero, balancing all considerations.”
Joe McDonnell, Chief Investment Officer, Border to Coast, said: “The transition to a net zero economy will require wholescale changes to how the economy and society functions, and demand significant capital investment.
“The collective scale offered by pooling enables the development of innovative solutions that not only expand Partner Fund access to the investment opportunities involved in decarbonisation – through the likes of the innovative £2.6bn Border to Coast Climate Opportunities strategy – but also to provide the capital needed to fund the energy transition and support global net zero goals.
“We’re proud to showcase through our own approach and this collaboration how investors can be an active part of the climate transition.”