PLSA – Industry view
Nigel Peaple is director of policy and advocacy at the PLSA
PENSIONS AND INVESTMENT IN THE UK ECONOMY
In the month the PLSA hosted its annual investment conference in Edinburgh, Nigel Peaple outlines the topics that matter most to the pensions industry.
A debate about how to harness UK pen- sion assets to drive growth in the British economy has heated up in recent weeks with the Chancellor of the Exchequer to the Lord Mayor of London lamenting a perceived lack of investment by the £2.5trn UK pension sector in high growth, but high risk, venture capital assets. We should not lose sight of the fact that our pension schemes already invest more than £1trn in UK-domiciled shares and bonds and have a higher domestic equity exposure than some of their giant over- seas pension counterparts, including those in Canada, Japan and the Netherlands. Nevertheless, pension funds are open to initiatives that would result in greater investment of pension assets into UK growth, provided that the needs of savers, pension funds and the government can be aligned.
At this year’s conference, economic secre- tary to the treasury and city minister Andrew Griffith MP discussed the gov- ernment’s ambitions to unlock pension scheme investment in UK growth assets, while a further keynote saw a panel of leading chief investment officers discuss the challenges and opportunities from doing so.
Path to net zero
UK pension schemes are increasingly making progress towards net-zero align- ment, with six in 10 already having a net- zero alignment in place. Of those that don’t, this is largely to do with the difficulties of comparing like-for- like data received from investee compa- nies and wanting to ensure their commit- ment is robust. Pension schemes have called on the gov- ernment to progress its green finance strategy, finalise the UK green taxonomy, ensure climate reporting is embedded across the investment chain and acceler- ate efforts to make the City of London the world’s first net-zero financial centre. At Investment Conference 2023, former shadow chancellor Ed Balls discussed how a future Labour government would harness the power of pension investment to support the transition to net zero. Del- egates also heard from experts about how to integrate climate risk, transition risk and scientific research into asset class return projections, as well as practical advice about completing TCFD reports. A panel of pension fund investment man- agers also explored how pensions can support the decarbonisation agenda while avoiding unintended consequences.
A new environment for DB funds At this year’s conference there was a sig- nificant focus on the changing landscape for defined benefit pension funds. Higher interest rates have improved fund- ing positions and opened the door to buy- out for many schemes. The conference explored the key issues schemes need to assess in their endgame thinking. From the pros and cons of moving to buyout, the need for residual risk cover and avoid- ing traps in the transition to endgame. We also took stock of liability-driven investment in the wake of the “mini” budget and gilt market turmoil last year. Schemes of all sizes are re-thinking scheme governance, asset allocation and portfolio reconstruction. Sessions also looked at what lessons have been learned, how schemes should man- age risk and what governance structures they should have in place for the future. Also, high up on defined benefit funds’ priorities is the DB Funding Code. Experts discussed what the final code might look like and how it will be applied once it becomes operational later in the year.
Investing in a challenging economy Fresh stagflation and recession fears mean the challenging investment condi- tions of the last decade are not going away any time soon.
In what is frequently one of the most pop- ular sessions at the investment confer- ence, senior representatives from asset managers provided an outlook on invest- ments and opportunities for pension funds. They explored the opportunities and risks across different asset classes as well as inflation protection measures.
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ISSN: 2045-3833 Issue 124 June 2023 | portfolio institutional | 11
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