ESG Club
Joe Dabrowski is the deputy director of policy at the Pensions and Lifetime Savings Association
POLICY CERTAINTY AND INCENTIVES ARE THE BEST WAYS TO PROMOTE PENSION INVESTMENT IN UK GROWTH
At the start of June, the Pensions and Life- time Savings Association (PLSA) hosted some 800 pension and investment pro- fessionals in Edinburgh for our annual investment conference.
Over two-and-a-half days we heard from more than 100 speakers across 42 ses- sions, covering topics as wide ranging as investing for a less carbon intensive future, liability-driven investment, post- retirement products and driving better value for money. But the liveliest debate, and the one which had dominated the headlines in the run up to the conference, was about pension funds’ role in driving growth in the UK economy. Today, UK pension funds invest almost £1trn in the UK through a mixture of shares, corporate bonds, government debt and other asset classes. This invest- ment generates the capital businesses need to expand their operations, hire more employees and develop new prod- ucts and services. It also supports spend- ing on infrastructure, renewable energy and social programmes. However, during recent months there have been many public calls, from gov- ernment, stakeholders and the media, for pension funds to play a bigger role in pro- viding additional capital to support growth in the UK economy, especially through increased direct investment in
36 | portfolio institutional | July-August 2023 | Issue 125
infrastructure, private markets and ven- ture capital. Many commentators have suggested that the best way of achieving additional investment in UK growth assets is by undertaking radical and rapid consolida- tion of the pensions sector. We do not dis- agree that scale can have many advantages but, in our assessment, there are many quicker and simpler ways of achieving these objectives.
Initiatives to support pension fund investment in UK growth In a new paper, Pensions and growth, the PLSA has identified a dozen opportuni- ties to encourage all types of pension fund to invest further in UK growth. Impor- tantly, these measures do not inhibit pen- sion schemes’ ability to direct the invest- ment of their members private savings, and do not dilute their fiduciary duty to scheme members.
Chief among them is establishing a rich and continuous pipeline of enterprises needing investment for providers to bring to market and investors to choose from. The asset management industry should be encouraged to focus on sourcing UK opportunities and developing new invest- ment funds and products (such as long- term asset funds) which are appropriate to pension fund needs. The British Busi- ness Bank could also be given an extended scope to support companies that need scale up capital, and to create or partner with funds that can bundle up the assets in a form that would be suitable for pen- sion funds. Initiatives like the Long-term Investment for Technology
and Science (LIFTS),
which alter the risk-return component of an investment, are appealing to pension funds provided the financial support from government is of a long-term nature. Enhancing the tax treatment of domestic investments, as they do in France and Australia, also merits exploration. We also want to see the government press ahead with its welcome plan to increase
PI Partnership – PLSA
auto-enrolment contributions by remov- ing the lower earnings limit and by start- ing automatic enrolment at age 18 instead of 22. Only by increasing the flow of new assets into defined contribution pensions can we hope to provide more capital, and better retirement incomes, in the future. The government should also consider fur- ther increases in contribution levels from 8% to 12% during the next decade. Arguably the most important thing the PLSA is asking of the government is policy certainty. Setting out a clear plan for the future of the UK economy, for example on the green transition, will help draw pension fund investment and allow the UK to compete with non-domestic assets. Pension funds play an essential role in supporting the UK economy. The UK has one of the most sophisticated and mature pensions systems in the world – it is a great British success story, that provides security to tens of millions of savers. How pension funds can play a bigger role in providing capital to support growth in the UK economy is an important question, and in our discussions with schemes there is a clear appetite to invest in the UK – where it is in the interests of savers. Our proposals build on current govern- ment initiatives and address the needs of the pensions landscape as it is now. We risk unintended consequences by trying to radically reshape the market or water down the fiduciary duty that is fundamen- tal to our system.
You can read the ‘Pensions and growth’ paper at
www.plsa.co.uk.
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