Johnson and Sunak call on investors to create UK ‘investment big bang’
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Prime minister Boris Johnson and chancellor Rishi Sunak have written an open letter to the pensions industry calling for an ‘investment big bang’ into UK long-term assets to drive the ‘build back better’ agenda including financing climate change adaptation. They invite institutional investors “who are willing to make specific commitments to invest more in Britain’s long-term growth” to an ‘Investment Summit’ in Downing Street in October.
The prime minister and the chancellor are saying UK investors should profit from the country’s predicted growth of 7.2% for this year, admonishing institutional investors such as pension funds and hinting at cultural barriers.
They said the government will contact investors during the coming weeks to tell them more about its plans, and to invite those willing to make specific commitments to invest more in Britain’s long-term growth to an Investment Summit in October.
In an open letter, they said: “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.”
They said they are already trying to remove barriers for investment to change attitudes, and included a veiled threat: “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.”
Among others, the Department for Work and Pensions has – again – consulted on changing the default charge cap to facilitate investment in higher charging illiquid assets and is proposing to extend an incoming requirement on small defined contribution schemes to assess value for money and consider consolidation to schemes with assets up to £5bn, which has already met with resistance from industry. The government has also created a UK Infrastructure Bank and is issuing its first green gilt next month to finance green projects.
A Productive Finance Working Group was set up last year, consisting of the Treasury, Bank of England and the Financial Conduct Authority, to seek to direct institutional money into domestic assets, with the FCA creating a new type of long-term asset fund.
The Productive Finance Working Group is the latest incarnation of attempts to attract private capital for strategic investments. Looking to pensions money to aid the latest required recovery has been an ongoing theme for the past 20 years, from the 2001 Myners report bemoaning a lack of private equity investment, to the 2014 idea of pooling local authority scheme assets and the 2016 Patient Capital Review.
Why are pension funds not investing in these assets?
The complaint about UK pension funds being underrepresented as UK investors might not be unfounded; 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. There are however some ‘natural’ causes for this, such as the fact that many defined benefit schemes are mature and in the process of derisking heavily into bonds, while illiquid assets carry high risk. DC assets were until recently too small to make such investments.
Johnson and Sunak admit that “choosing which assets to invest in to secure the best outcomes remains a matter for pension fund trustees, and other custodians of institutional capital”.
However, they added that trustees of DC and DB schemes and advisers should consider the UK for its investments. “We are challenging you this summer to begin to invest more in long-term UK assets,” they said, adding: “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.”
What does the industry say?
Some providers are supportive of the government’s ambitions, saying they welcome the call to action.
“We will continue to seek the best possible outcomes for our customers and our shareholders, and believe that investing in a sustainable long-term manner across a range of asset classes delivers this whilst also supporting the UK to build back better and greener,” said group chief executive of insurance company Phoenix, Andy Briggs.
Anne Richards, chief executive of provider Fidelity International, said her firm can see the benefits of making long term, less liquid assets available to both DC and retail customers. “Making this a success will require a collaborative approach from a policy, regulatory, tax, industry and wider stakeholder perspective and we welcome the opportunity to work together to make it a reality,” she said.
But others in the industry have questioned the benefit of consolidating schemes for the purpose of inward investment as their first duty is to members.
The pensions industry is decidedly uneasy about the suggestion that all DC schemes below £5bn – a substantial figure that would capture some master trusts – should consider consolidating. The Pensions and Lifetime Savings Association argued that there has been “little evidence to support the suggestion that the benefits to members of extensive consolidation would outweigh the costs involved”. Provider Aegon also said merging schemes into larger funds would not automatically improve outcomes and has urged the government to put these plans on hold.
PLSA chair Richard Butcher said facilitating scheme access to alternative assets would be welcome.
“If they can succeed at this there is a real opportunity for a win-win here: an alignment of the national interest with the interest of pension fund savers," he said about the government's plans, but added: “It is important to recognise, though, that the UK pensions sector... is not homogenous. Each fund will, by law, have its own prudently managed well diversified investment strategy and an approach designed to suit its members particular needs. Above all else, trustees’ primary duty is to look after the saver first."
There is “more than a whiff of patriotic fervour in this latest drive to ‘Build Back Better’”, said Tom Selby, head of retirement policy at investment platform AJ Bell.
PLSA chair Richard Butcher said facilitating scheme access to alternative assets would be welcome.
“If they can succeed at this there is a real opportunity for a win-win here: an alignment of the national interest with the interest of pension fund savers," he said about the government's plans, but added: “It is important to recognise, though, that the UK pensions sector... is not homogenous. Each fund will, by law, have its own prudently managed well diversified investment strategy and an approach designed to suit its members particular needs. Above all else, trustees’ primary duty is to look after the saver first."
There is “more than a whiff of patriotic fervour in this latest drive to ‘Build Back Better’”, said Tom Selby, head of retirement policy at investment platform AJ Bell.
“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,” he noted.
He said while UK assets may offer growth opportunities, they 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,” he pointed out. “Of course illiquid investments can be perfectly appropriate, but should only be considered if they fit with your retirement goals and risk appetite.”
