The recent liquidity issues faced by defined benefit (DB) pension schemes could deal a potentially fatal blow to government hopes for greater pension scheme investment in long-term illiquid projects, such as infrastructure, according to LCP partner, Steve Webb.

Webb highlighted a number of recent government initiatives that aimed to encourage more pension scheme money to be used to fund major projects, such as the government's challenge for institutional investors to trigger an investment “big bang” to boost British growth.

Plans to reform the pension charge cap were also included in the recent mini-Budget, in an effort to "unlock" pension investments into UK assets, with draft regulations on further changes designed to encourage greater illiquid investment by defined contribution (DC) schemes currently under consultation.

However, Webb pointed out that the large majority of UK pension assets are held by DB pension schemes, meaning that the success of the government’s drive to get more pension fund money invested in illiquids will depend fundamentally on the decisions made by DB pension schemes.

This could be a cause for concern, as Webb noted that the recent market turmoil has led private sector schemes to attach much greater weight to access to liquid assets to provide greater financial stability in the event of market turmoil.

Webb explained that as illiquid investments cannot easily be disposed of, it is likely that over time schemes will look to reduce their holdings of such investments and will be more reluctant about entering into new long-term commitments.

Although he clarified that these constraints will be less relevant to some types of DB pensions, with local government schemes and open DB schemes still likely to see a role for infrastructure investment, he noted that these two categories only account for a "minority" of all DB assets.

Webb continued: “Cash-strapped governments see pension funds as a key way of raising the finance for long-term infrastructure projects designed to deliver on net zero goals and other government objectives.

“But the current drive for liquidity amongst DB pension schemes could seriously undermine the push for investment in illiquids.

“Where schemes are now targeting higher levels of liquidity they are likely to review the long-term assets they already hold and be more wary about taking on new commitments.

“The government may need to work much harder to persuade pension funds that investing in illiquids should be a priority at the moment”.

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