Schemes are not obliged to prop up UK economy

The result was a discussion among some economists and government officials about whether pension deficit contributions were to blame, whether cash that could have been used to fund business growth or employ staff was instead being swallowed up in pension black holes.

The sentiment was clear: pension contributions should be cut back if harmful to the UK’s economic performance. Government and the Pensions Regulator could indeed reduce pension contributions if they choose, through legislation, guidance or just through influence.

But lack of cash is not the constraint for many companies and, anyway, what government would want to be blamed for more underfunded schemes falling into the Pension Protection Fund, especially with the knock-on effect this would have on people’s pensions?

On the other side of the coin, others would argue that pension schemes could proactively help the economy by way of their investment decisions.

Certainly, the British government has long cast an envious glance towards the billions of pounds tied up in private and public pension schemes, and has often voiced its opinion that this money could be employed investing in UK infrastructure as a means of stimulating economic growth. 

So how should scheme trustees think about this? Clearly, no UK pension scheme is large enough on its own to affect the macroeconomy. Yet it is possible that the vast assets held in UK pension funds could be pooled, and then deployed to do so. Hence the National Association of Pension Funds and the PPF's Pensions Infrastructure Platform, which aims to put this theory into practice.

Is the Pip a good model?

While it is still too early to judge the success of the model – so far only around £2bn of investment has been committed (see box) – it could provide a boost to the economy in the long term if it grows. Certainly, with traditional infrastructure lenders retreating from the market and the government intent on delivering its pledge to spend £100bn on new projects, this source of capital could prove vital.  

But the key question is: do pension schemes have an obligation to invest or act in ways that will help the macroeconomy? My very clear answer is no.

Government has long cast an envious glance towards the billions of pounds tied up in private and public pension schemes

In terms of investment, pension schemes have stringent legal duties to ensure their assets are used to provide benefits for their members in accordance with the terms of the trust deed, case law and statute. Trustees should invest in infrastructure only if the expected risk and return are attractive.

The macroeconomy should benefit anyway if that condition is met, but that gain should not weigh in the decision. Trustees would be failing in their duties if they used the wider benefits to justify an investment that would otherwise not be accepted. Any wider benefits are a matter for government and should attract some form of public subsidy or risk underpin.  

So investment in areas like UK infrastructure should be treated as a commercial decision, with its risks and rewards compared against an array of other options, disregarding potential macroeconomic effects. 

Of course, I’m not trying to dissuade schemes from investment in UK infrastructure. Far from it. To my mind, cash flow returns from long-dated assets such as infrastructure potentially offer a good match for pension scheme liabilities, with an internal rate of return that can be both stable and higher than that assumed by many schemes for their equity return.

The decision whether such an investment would benefit scheme members should be based on accurate and timely information on their liabilities, to allow schemes to analyse how such assets could better match their individual scheme’s cash flows.

As always, the criteria for success should include the impact on funding risk and volatility together with the long run potential for sponsor contributions and, ultimately, the sponsor’s ability to meet the pension promises.

Let’s leave it to Mr Osborne to worry about the state of the British economy; the pensions industry has enough of its own problems for now. 

David Norgrove is chair of PensionsFirst and Long Acre Life