A gentle wind of change is rustling the leaves in the cautious world of UK pension fund investment as it rises to the challenge of channelling pension fund assets into domestic infrastructure and high-growth sectors. The government has pointed with increasing urgency to countries such as Canada and Australia that have demonstrated stronger models of institutional collaboration, particularly in transport, energy, and technology projects.
With its origins in this government pressure to direct funds to infrastructure and British-based private investment assets, the many fine words and pledges are now delivering measurable change, writes Contributing Editor David Worsfold.
The most significant of these was the Mansion House Accord, signed back in May by 17 of the largest workplace pension providers (see below for list of signatories) in the UK. This committed them to invest 10% of their defined contribution default funds in private markets by 2030, with at least 5% allocated to UK assets. These firms said that total pension assets in the scope of the agreement amount to £252bn.
Earlier this month, the first fruits of this initiative were unveiled when the Sterling 20 Club was launched at a government regional investment summit in Birmingham, drawing in additional support and announcing some of the first major investments. L&G pledged £2bn for UK “impact” projects over five years, including developing 10,000 affordable homes and funding regeneration schemes, NEST said it would be investing £500mn via Schroders Capital, with £100mn earmarked for UK opportunities, and £40mn is to be earmarked for an expansion of high-speed broadband in rural Scotland and Northern England.
Overseas investment boost
The launch of the Sterling 20 Club was also an opportunity for Rachel Reeves, the Chancellor of the Exchequer, to announce one of the most significant overseas investments in the UK under this initiative so far with Australia’s largest pension fund, AustralianSuper, committing £500mn to the UK rental sector. This was all good new forthe embattled Chancellor who said: “This is about getting Britain building again — bringing our savings, our investors and our regions together to deliver the homes, infrastructure and industries that will drive growth and create good jobs in every corner of the country".
There is also evidence of a growing interest in the tech sector, albeit with a large dose of caution as pension funds measure the potential risks of taking too speculative a stance by investing at too early a stage in a firm’s development. The preference has been to access private markets via investment vehicles such as long-term asset funds (LTAFs) targeted at science and technology firms with proven growth potential.
The biggest announcement so far was the British Business Bank’s (BBB) Long-term Investment for Technology and Science (LIFTS) initiative, which was launched last November. This saw the BBB – a development bank wholly owned by the British government – invest £250mn into a Schroders Capital LTAF, matched by £250mn pension investment, forming a £500mn vehicle targeting UK tech and science scale-upswith life sciences, artificial intelligence, quantum computing, fintech, and cybersecurity identified as the key sectors.
Momentum is building
Several recent reports have highlighted other moves that will demonstrate to the government that momentum is steadily building up. According to Dakota Marketplace, which maintains large databases aimed at investment professionals, some Local Government Pension Scheme (LGPS) pools in the UK have begun achieving around a 6% allocation to private equity and private markets, with some setting targets of 10%+ by 2030.
The report underlines the significance of these changes in investment strategy by estimating that each 1% shift in allocation across all UK pension funds corresponds to about £25bn of capital, figure well ahead of the government’s current aspirations.
This should reassure the Treasury that its current collaborative approach is bearing fruit as it likes to quietly remind the sector that it may invoke reserve power to mandate allocations if the voluntary targets are not met. With the pressure on the Chancellor to stimulate growth without breaking Labour’s constraining pledges on borrowing and taxation, the threat that she may pull the compulsion lever is one the sector is taking seriously.
• Signatories to the Mansion House Accord: Aegon, Aon, Aviva, Legal & General, Lifesight, M&G, Mercer, NatWest Cushon, Nest, NOW: Pensions, Phoenix Group, Royal London, Smart Pension, the People’s Pension, SEI, TPT Retirement Solutions, and the Universities Superannuation Scheme. It was jointly led by the Association of British Insurers, the Pensions and Lifetime Savings Association and the City of London Corporation.