Large pension schemes and providers are already contributing tens of billions of pounds in economic benefits to the UK, according to new research.
A report from WPI Economics, a research and data consultancy, analysed publicly available data from 22 of the UK’s largest defined contribution master trusts and defined benefit pension schemes.
It found that existing investments in housing and infrastructure generated more than £71bn in “total economic gross value added” over three years after an investment is made. The allocations are also estimated to have supported 320,000 jobs.
The funds in the analysis also allocate more than £37bn to UK corporate bonds, which the report said helped support long-term funding for domestic companies and saved £120m a year in capital costs.
The funds also allocate approximately £1 in every £4 to private markets, with half going to the UK – significantly more than the levels set in the voluntary Mansion House Accord that was announced at the start of this week.
Between them, the 22 organisations had an estimated £280bn invested in the UK economy “across a range of assets”, the report found.
The WPI Economics report was supported by eight pension providers and investors, including Border to Coast Pensions Partnership, Brunel Pension Partnership, Brightwell, Local Pensions Partnership Investments, Nest, People’s Partnership, Railpen, and the Universities Superannuation Scheme.
Mandating investment ‘will not address issues’
The WPI report also argued that any attempts to require minimum levels of investment in UK assets would not address the problems that are hindering economic growth.
“Mandating the investment approach taken by pension funds could harm the economic value currently generated by large funds.”
WPI Economics’ ‘The scale of it’ report
“Independence is critical to the effectiveness of large funds,” the report stated. “Mandating the investment approach taken by pension funds could harm the economic value currently generated by large funds.”
Forcing pension schemes to invest in specific areas could artificially inflate prices, the report said, potentially increasing volatility and exposing pension schemes to underperformance risks.
“This could also undermine members’ trust in their pension provider and some of the benefits of fiduciary duty,” the report said. “Without full discretion to invest in a way that aligns best with their members’ financial interests, fiduciary duty – as it is understood today – would be weakened.”
This independence was “key to achieving benefits of scale”, WPI Economics said.
Joe Ahern, director of policy at WPI Economics, added that policymakers needed to be “conscious of the potential unintended consequences that could flow from directing pension funds on how and where to invest”.
“Investment freedoms are key to these funds playing a strong role in society and in the economy while getting the right outcomes for pension savers,” he said.
‘Independence is paramount’
“UK-based asset owners have a clear alignment of interest with domestic assets and already deliver a huge amount to the economy,” said Morten Nilsson, chief executive officer at Brightwell, which runs the BT Pension Scheme.
“Consolidation and creating scale is key, and is gathering pace in the industry. This will deliver far-reaching benefits – but for these benefits to be fully realised, retaining independence to invest in the best way to meet the needs of members and savers, without intervention, is paramount.”
Rachel Elwell, CEO of Border to Coast Pensions Partnership, said the “scale and sophistication” of large pension funds already supported UK businesses, infrastructure and society through long-term investment.
“Harnessing these benefits and removing obstacles to investment will be critical in achieving our shared ambitions for UK growth,” she said.
Border to Coast manages £52.3bn on behalf of 11 funds within the Local Government Pension Scheme. This includes six strategies dedicated to UK assets, including private markets, real estate, listed equity and sterling-denominated fixed income. Other strategies, including its Climate Opportunities Fund, also allocate substantially to the UK.
Matthew Graham, chief business development officer at Local Pensions Partnership Investments, explained that his organisation was able to create scalable investment strategies for its partner funds in part because of the independence they enjoy.
“We work with our client funds to provide investment advice, with clients retaining sovereignty over the strategic asset allocation, which we then implement through a range of bespoke pooled funds,” he said.
“This approach allows us to create scale, and the benefits this provides, while also ensuring we provide investment solutions that deliver different risk and return levels reflecting individual client needs.”
