Rob Yuille of the Association of British Insurers (ABI) says it is time we defined our terms around productive investment to make sure policies work for all stakeholders.
Productive investment is one of the most important, yet most misused, phrases in the recent history of pensions. “It’s good for productive investment” has become a go-to justification for various stakeholders’ policy ideas, where it is only loosely relevant and often without evidence.
This has diminished the meaning of the phrase, such that it triggers the scepticism alarm in the heads of weary pensions policy people whenever they hear it.
There is a simple fix: whenever you talk about productive investment, say what assets you’re investing in, why they are productive, and be honest about the risks.
Defining productive assets
There is a ready-made definition from the Bank of England’s Productive Finance Working Group, which describes productive investment as “spending by businesses that has the potential to expand the productive capacity of the economy, whilst also generating marginal returns to society that exceed the marginal cost of investment to society. Such investments include plant and equipment, research and development, technologies and infrastructure.”
In other words, investments that have the potential to grow the economy in the long term and benefit society more than they cost.
If that is too restrictive, then the Department for Work and Pensions’ paper on pension fund investment and the UK economy lists a much wider range of assets and their theoretical and empirical impacts on growth.
At the ABI, we try to show how our members invest productively and collect evidence of it. For example, during the process of the Solvency UK reforms, insurers pledged to invest £100bn into UK productive assets over a decade. We’re tracking progress towards this pledge and working with firms to facilitate a pipeline of investable opportunities.
In 2024, annuity providers delivered £10.9bn of primary domestic investment, investing in UK housing and infrastructure, including regeneration projects, renewable energy, healthcare, and social housing.
These are productive because construction of these projects supports a range of sectors and creates jobs; increasing the housing stock supports the capacity of local economies to grow; and improving infrastructure contributes to efficiency gains for business and the public sector. There are risks in infrastructure and real estate investment: it is more illiquid, and long-term commitments can conflict with changing political and regulatory priorities.
Productive finance and endgame decisions
Insurers are well placed to invest in this way and to manage the risks because of their expertise, track record, and scale. This explains why insurers are well represented on the Sterling 20, the British Infrastructure Taskforce, and why we have our own Investment Viability Group to fit annuity investments within regulatory requirements.
More widely, the annuity market invests heavily in the UK. Our data shows that in 2023, £178bn (65%) of assets held by participating firms providing bulk and individual annuities were invested in the UK, and a quarter of this was in gilts. This is compared to an estimated defined benefit (DB) pension scheme investment of 55% of total assets in the UK economy in the same year, according to Pension Policy Institute estimates.
In that context, it is surprising to hear claims that other DB endgame options yield more growth and are better for the economy. Productive investment is given as a reason for making it easier to extract surpluses from DB schemes. Indeed, in debates on the Pension Schemes Bill, running on and taking a surplus was described as a way for pension money to be “used for national investments… to boost Britain”. The government’s original press release described it as “ready to boost growth”.
Yet surplus extraction is an outlier policy in the Pension Schemes Bill, because it is not about scale. The rest of the main measures in the bill will all increase consolidation. Surplus extraction, conversely, is more about enabling schemes to go it alone and run on for the profit of the sponsor.
Sponsors might extract a surplus and invest in tech upgrades or expansion of their businesses and help to drive growth, but they might not. They might share surplus with scheme members, but they might not; and if they do, those members might spend it on the high street or invest it, but they might not.
Similarly, in comparison with different DB endgames, we often hear that schemes running on can invest more productively. But how do DB schemes that choose to run on actually invest differently? There is one main difference in how insurers invest, which is equity exposure: you won’t find many equities backing annuities, at least partly because of the capital requirements they attract.
Running on for what?
If proponents of run-on want to point out the differences in how they invest, they can validly state that they are more likely to invest in equities. They could also say what proportion is in the UK, in unlisted equities, and scale-ups – if there are any.
It would also be honest to acknowledge the risks of doing so, to scheme sponsors, and ultimately to scheme members. But it’s not true to say they invest productively and insurers don’t.
Investment decisions in DB are made to provide scheme members with a pension for life. In truth, however, the regulatory frameworks governing the different institutions paying DB pensions significantly influence how investments are made, which goes some way to explaining the differences in approaches between organisations with the same aim.
It’s sensible for regulators, the wider industry, and other parties to work towards a common understanding of the trade-offs in investing and how to address them. That can lead to sensible conclusions about how to manage the investment and longevity risks of paying a pension for life, and what investment approach works best. It would be a productive way forward.
Rob Yuille is head of long-term savings policy at the Association of British Insurers.
