As the government gears up for supporting the economic recovery, pension funds are once again on the radar as potential investors into the nation. Can attempts to forge a partnership between state and asset owners ever succeed without crossing a red line? 

 

The UK is experiencing the deepest economic impact from Covid-19 among its European peers so far, thanks to prolonged lockdowns becoming necessary following repeated spells of lax rules on travelling and meeting up, and a new variant thought to be more contagious. 

 

 

The severity of the impact can be seen in jobless figures and profit warnings, and, as during post-2008 austerity, the Treasury is once more eyeing the pensions honey pot. It has made several attempts to direct how funded schemes, both local authority and private sector, invest their assets, showing a growing interventionist tendency. 

 

Back in 2014, the Treasury floated the idea of pooling local authority scheme assets with the intention of facilitating infrastructure investment, which they might otherwise be too small to do themselves. Although more infrastructure investments appear to have been made, this was largely into brownfield projects and not necessarily ones based in the UK. At some pools, funds have also decided to go it alone for now, saying the pool structure was taking too long to be set up. 

 

Despite this activity, not long ago only 3% of UK pension fund assets was committed to infrastructure, compared with 5% for other European pension funds and close to 10% for Australian and Canadian pension plans, according to consultancy bfinance. 

 

The 2016 Patient Capital Review sought to channel pensions money into domestic private markets hoping that post-Brexit, this would “drive GDP growth by supporting the most innovative businesses across the whole country”. 

 

Four years have passed and alongside Brexit, we have another crisis on our hands. The Treasury, this time together with the Bank of England and Financial Conduct Authority, is looking at how to entice large savings vehicles into national investments again, under the banner of ‘productive finance’, defined by the BoE as “investment that expands productive capacity, furthers sustainable growth and can make an important contribution to the real economy”. A working group will propose solutions for barriers to investment, considering potential fund structures to invest in long-term assets “that meet the demands of wide range of investors, including defined contribution pension funds”. 

 

Even the planned introduction of collective defined contribution schemes could be viewed in the light of national investment. Some believe that unlike a DC scheme, CDC schemes can remain invested in riskier assets; they are also centrally invested, opening the door to allocations to infrastructure and venture capital. 

 

 

Given the combined impact of lockdowns and Brexit, the need to deploy capital internally has arguably never been greater. Some would say that many of the national investment opportunities could work in the interest of savers by producing long-term income streams. But the fact that fiduciary duty and the interest of pension fund members still come first also means that many other such investment opportunities will never make it onto trustees’ agenda. 

 

One question that arises is, why is a government that can borrow at record-low rates so stubbornly engaged in trying to divert pension savings into national projects? In part, this could simply be down to the enormous price tag of some of these projects – think HS2 or nuclear power stations. Another possible reason is that the level of investment needed into various projects – after a dearth of upgrades and new projects during austerity – is now greater and there is a realisation that a catch-up is overdue.  

 

Others still might say there are ideological reasons; what the 'correct’ size of the state should be is how large political parties differentiate themselves, and Conservative governments traditionally want to keep the state small; still, the populist stance of the current government has pushed it into acting like a left-wing government on more than one occasion - most notably by borrowing record amounts to avoid economic collapse during Covid-19.  

 

Whatever the driver, pension funds should likely prepare for more regulatory tweaks here and incentives there to try to drive private savings into national projects and help the recovery. Whether they will play along will hopefully depend on their members’ needs first and foremost.