The UK government’s ambition to fuel a post-Covid “investment Big Bang” with billions of pounds of pension money risks petering out after retirement funds balked at Downing Street’s call to plough more cash into projects.
With the public finances strained by the pandemic, the prime minister and chancellor last month challenged UK pension funds and asset managers, who hold £1tn of assets, to use their funds to support an “innovative, healthier, greener future for their country”.
But a Financial Times survey of private and public sector retirement schemes, and managers of pension cash, suggests the appeal is not generating widespread support, because of concerns over cost and complexity.
One senior executive with a large pension scheme said the government’s push “threatens to launch with a whimper more than a Big Bang”.
“They can’t suddenly just force people to turn on the [cash] tap,” a senior executive with a large asset manager told the FT.
The FT received responses from 22 funds and managers who between them hold more than £700bn of assets and have tens of millions of policyholder and pension customers.
Unease was greatest over a patriotic appeal to invest more domestically, including in infrastructure projects, such as bridges, social housing and renewable energy, and in private equity and venture capital, with both driven by the government’s “build back better” and “levelling up” policies.
“We are a global investor and have a fiduciary duty to invest in assets that best suit our investment objectives regardless of geography,” said the £57bn British Telecom Pension Scheme.
“BTPS has always been a major investor in the UK . . . but as a large pension scheme, if the right opportunities are not available here, we would invest elsewhere.”
Abrdn, the UK asset manager formerly known as Standard Life Aberdeen which has £475bn of assets, said it invests in the UK if it “makes sense”.
“The first question I ask is not ‘Will this build back better, or will this level up?’,” said Neil Slater, global head of real assets, with Abrdn. “The first question I ask is ‘Does this make sense for my clients?”
Most pension funds’ portfolios are dominated by stocks and corporate bonds.
Local government pension schemes are already big investors in the types of assets the government wants to receive more backing, but some said the government’s strategy would not sway investment decisions.
“The kind of opportunities referred to by government in the letter to pension schemes would be considered in the same way as any other — ie does it fit the strategy and does it provide the risk/return characteristics the fund is seeking,” said Jeff Houston, secretary to the Local Government Pension Scheme advisory board.
The so-called illiquid assets the government are pushing are more commonly held in defined benefit-style schemes, which have secure pension promises to meet. They are less common in defined contribution plans, where no promises are given over retirement income levels, due to charge caps on member fees, and trustee concerns about complexity and liquidity.
Scottish Widows, whose flagship default DC pension fund has £40bn in assets, is exploring illiquid investments, believing they have clear investment benefits, but it added: “These strategies come at a cost — they are charged at a premium to public markets and are also complex.”
“For us to make these investments on behalf of our customers, we must weigh up the benefits versus drawbacks, which needs time and the appropriate expertise.”
Aegon, with £47bn under management, said: “Our primary objective is to maximise the cost/risk/return profile of our default funds. Any decision to invest in illiquid, including asset classes and percentage holdings, would be made with due consideration to this objective and would require thorough analysis before being implemented.”
Some funds were more openly critical of the government’s initiative.
“We do not believe the UK government should play a role in guiding pension asset allocation,” said PensionBee, which administers around £2bn of pension savings.
Many survey respondents said the government could do more to encourage investment in alternative assets by offering incentives such as underwriting riskier investments, for example in early-stage companies.
The £80bn Universities Superannuation Scheme said that to maximise the success of the Big Bang initiative, “it will be important for the government to ensure predictable, transparent and stable regulation of infrastructure assets”.
Some pension schemes are getting behind the government’s drive, including Nest, the £20bn state-backed pension fund, which recently announced ambitions to grow a £1.5bn private equity allocation, or 5 per cent of its assets, by 2024.
Phoenix, the UK’s largest long-term savings and retirement business, with £300bn of assets, is also publicly supportive.
“We don’t have a choice but to invest more in illiquid assets, albeit with the right risk profile,” said Mike Eakins, chief investment officer with Phoenix Group.
“Yields on corporate bonds and government bonds have been suppressed to such a level that it is not possible for us to meet our obligations to either our policyholders or our pension customers by simply restraining the investable universe to gilts and corporate bonds.”
The government said: “Global investors are benefiting from the fruits of UK ingenuity and enterprise, and we also want to see UK pension savers being given the opportunity to back British success stories, access better returns and support an innovative, healthier, greener future for their country.”