From the blog: UK pension schemes have no obligation whatsoever to help the national economy.
Pension scheme trustees are legally bound to try and make investments that provide returns to pay pensions. And nothing more.
Yet UK pension schemes, with combined assets north of £2tn, have always been some of the larger contributors to funding the UK economy and, with the right incentives, more could follow.
Pension funds have always been aware that the health of the UK economy and their ability to continue paying pensions are closely linked. Problems in the UK economy weaken the strength of the companies in which pension funds invest.
So can pension funds assist the UK economy and still achieve their objectives?
Most defined benefit UK pension schemes have liabilities that are linked to a measure of domestic inflation and are denominated in sterling. This means that the most obvious assets are likely to be linked to long-dated UK assets that have an income linked to inflation.
Real assets to match liabilities
Pension funds are increasingly recognising that some areas of the UK economy need help.
At the same time, the returns they receive from more established investments – such as government bonds – are extremely low, and the risks on investments that pay the required return can appear high.
Pension schemes, local authority funds foremost among them, have also financed a growing number of residential, social and university housing schemes – often via long-lease real estate funds that deliver secure inflation-linked returns – as well as commercial property schemes.
There has been a growth in the number of pension funds making direct investment in real assets in the UK, and pension funds that finance housing, wind farms, solar parks, companies and other essential parts of the economy benefit from the long-dated cash flows to match their liabilities.
As banks remain constrained in their ability to provide long-term finance, it would be reasonable to expect this trend to continue.
Today, by choosing well-priced investments that match liabilities, not only are pension schemes fulfilling their fiduciary duty to members, they are also helping to boost the UK economy.
William Nicoll is co-head of alternative credit at asset manager M&G Investments
