Industry experts have welcomed the government's challenge for pension schemes to support Britain's post-Covid recovery by investing in UK long-term assets, although some expressed concerns about the ongoing barriers and issues around diversification.

The Prime Minister and Chancellor issued the challenge to UK institutional investors, including pension funds, yesterday (5 August), urging investors to spur an "investment big bang" that could drive the UK's recovery following the Covid-19 pandemic.

Industry experts have broadly welcomed the challenge, with Scottish Widows head of policy, Pete Glancy, for instance, agreeing that the government is right to look to the power of pensions to help the country recover.

He stated: “Trillions of pounds are invested in UK pensions, which could make the difference as the country sets its sights on a return to prosperity. UK savers will benefit too, as the returns on these long term investments hold the potential to give a much-needed boost to retirement pots.

“We’ve long campaigned for the UK’s pension savings to be unleashed on the country’s infrastructure and economic initiatives, and its promising to see the government acknowledging the obstacles still preventing long-term illiquid investments.

"We hope this talk turns to action and the government’s call for an investment big bang does not end in a whimper.”

Interactive Investor head of pensions and savings, Becky O’Connor, also agreed that while pension savers may feel dubious about the plans and wonder whether this will compromise their life savings, it “absolutely shouldn’t”.

“The primary duty of pension fund managers remains to deliver a good return to customers so they can retire with a decent income," she stated.

"This can be achieved through the kind of investments the government is suggesting, such as green infrastructure. A win-win is possible over the long term. But it can be easier to make the wrong decisions with other people’s money, too."

Considering this, O'Connor said that transparent communication about what people’s savings are being invested in and the associated risk levels will be "more important than ever".

LCP partner, Myles Pink, echoed this, suggesting that whilst an 'investment big bang' would be hugely welcomed by pension schemes, as long-term investors seeking stable returns, there are still concerns around the barriers facing trustees.

"This must be more than just warm words from government," he warned. "Trustees are willing to invest for the long term but need the government to remove the barriers to this type of investment and to help ensure there are suitable projects to invest in”.

Concerns around the barriers facing pension schemes were also raised by EY global investment advisory leader, Gareth Mee, who warned that there is a challenge making these assets accessible to pension funds with sufficient flexibility in order to manage complex cashflows, “not least because many schemes are too small to justify or be able to invest directly into large and illiquid assets”.

He said: “Accelerating progress to help pension funds invest in longer dated private assets could go a long way to improve returns, and ultimately will benefit savers and sponsors of DB pension schemes.

“Different types of schemes have different barriers to using long-term illiquid assets, so there are a number of key points to consider. For DC schemes, a more flexible charge cap could be implemented, for example.

“Covering all schemes, one of the main barriers to investment from pension schemes is the level of complexity, diversity, risk and reward of the potential investments, and this must be addressed.

"The level of expertise and manpower needed is significant and particularly challenging for smaller schemes that don’t have the size of team to invest directly or to oversee the investments made. Greater consolidation in the market could help more schemes access these types of investment and therefore increase the overall levels of assets invested.”

Adding to this, PLSA chair, Richard Butcher, agreed that there is a “real opportunity for a win-win here” by aligning the national interest with that of pension fund savers, clarifying however, that the UK pensions sector is not homogenous.

He explained: “Each fund will, by law, have its own prudently managed well diversified investment strategy and an approach designed to suit its members particular needs. Above all else, trustees’ primary duty is to look after the saver first.

“It is therefore welcome to also see the Prime Minister and Chancellor acknowledge there is no single ‘right answer’ when it comes to how much pension fund trustees should invest in long term UK assets.

“The evidence suggests that regardless of size, type or maturity of scheme diversification of investments is well- established as common practice with schemes investing across all asset classes, geographies and a range of risk profiles.

"It does however remain the case currently that investing in illiquid and alternative assets can often be more complicated, more costly and more resource intensive. Where this is the case, such investments are rightly much less compelling value for money than alternative options, irrespective of their potential upsides.

Octopus head of institutional funds, Mark Williams, however, argued that there are “ample untapped opportunities” in the UK economy that offer institutions the potential to make strong returns, as well as making a positive impact on the world.

"Beyond financial performance, these assets can have a significant social impact – like hastening the energy transition, or helping small businesses to scale and support the next generation of British champions," he stated, arguing that it would be a "real win if even a fraction of these institutions’ capital pools were allocated to the kinds of assets the government is highlighting".

This was echoed by Make My Money Matter campaign director, David Hayman, who said: “It's promising to see government recognise the power of our pensions in building a better world, but with COP26 on the horizon and the immediate impacts of the climate crisis already being felt by millions across the globe, UK pension funds must ensure that money is directed towards cleaner, greener investments.

"That's why we're calling on all pension schemes to listen to their members, and to the science, and commit to robust net zero targets including a 50 per cent reduction in emissions by 2030”.

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