The drive to increase pension scheme investment in productive UK assets is continuing to gain momentum following recent defined benefit (DB) funding improvements, although this could trigger greater competition with defined contribution (DC) pension funds, PwC has warned.

PwC’s Buyout Index continued to show a “significant” surplus above the estimated cost for schemes to buyout their promises in September, with a new record surplus of £300bn.

The group's Low Reliance Index, which assumes schemes invest in low-risk, income-generating assets like bonds, also showed a record surplus of £415bn.

PwC UK head of pensions funding and transformation, John Dunn, pointed out that with this new milestone in the funding level of UK DB schemes, the drive to increase pension scheme investment in productive UK assets is continuing to gain momentum.

“Our research suggests that there is at least a £300bn pot of assets that could be accessed to boost investment in UK businesses and major capital projects via release of this surplus to sponsors or direct investment by the schemes,” he continued.

“Even using a relatively small portion of this surplus could bring new projects to market, resulting in a supply increase and further investment opportunities using public and private capital.”

However, PwC DC pensions and benefits lead, Roshni Patel, pointed out that it is not just DB schemes looking at how they can invest in productive UK assets, as DC schemes are also looking to diversify into these alternative assets to boost member pots.

“An example of this is the recent partnership between some of the UK’s biggest DC pension providers, with a total commitment of up to £1bn to invest in build-to-rent property in the UK,” Patel said.

“With these types of assets in demand from both DB and DC schemes, not to mention other investors, will there be enough supply to go around?

“If not, with increased competition for these assets, prices could be set to rise - so it will be important for schemes to continue to assess value for money for their members, ensuring the price they pay doesn’t become over-inflated by market exuberance.”

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