Prime Minister, Boris Johnson, and Chancellor, Rishi Sunak, have challenged UK institutional investors, including pension funds, to make further investments in long-term assets to allow savers to benefit “from the fruits of UK ingenuity and enterprise”.

In a letter to the industry, Johnson and Sunak argued that an “investment big bang” is needed to unlock the “hundreds of billions of pounds” sitting with UK institutional investors and use it to drive the UK’s recovery following the Covid-19 pandemic.

The letter pointed out that global investors, including pension funds from Canada and Australia, are benefiting from the long-term UK investments, whilst over 80 per cent of UK defined contribution (DC) pension investments are mostly in listed securities, which represent 20 per cent of the UK’s assets.

“While we are glad that international investors prize UK assets, and are working hard to attract even more inward investment, we also want to see UK pension savers benefitting from the fruits of UK ingenuity and enterprise, being given the opportunity to back British success stories, and secure higher returns and better retirements,” the letter stated.

Furthermore, whilst the pair acknowledged the responsibility of government to remove obstacles and costs to making long-term illiquid investments in the UK, they argued that the government is “doing everything possible” to encourage change, "short of mandating more investment in these areas".

The new UK Infrastructure Bank, for instance, was described as "open for business” and ready to co-invest in green infrastructure, while the UK's first Green Gilt is set to be issued in September, in turn allowing institutional investors to fund the government’s “vital” green commitments.

The Department for Work and Pensions (DWP) has also recently undertaken work to reform the cap on fees that DC schemes can charge to ensure they are not penalised for over-performance and to accelerate consolidation.

In addition to this, the letter to industry confirmed that the Financial Conduct Authority (FCA), with the support of the Product Finance Working Group, will be launching a framework for a new vehicle for long-term investment, the Long-term Asset Fund, in autumn.

Despite this progress, Johnson and Sunak also recognised that which assets to invest in to secure the best outcomes remains a matter for pension trustees, acknowledging that there is no single right answer for the amount that should be invested in long-term asset classes.

However, the letter emphasised that consideration of UK long-term assets is something that both the Prime Minister and Chancellor “strongly believe” to be a question that all institutional investors should be considering.

It stated: “Whether you are a trustee or manager of a DC or DB pension fund, running an insurance company or advising investors on their investment strategy, we are challenging you this summer to begin to invest more in long-term UK assets, giving pension savers access to better returns and enabling them to see their funds support an innovative, healthier, greener future for their country.

“We know that this will require a change in mindset for many investors that won’t happen overnight, but that is why this change needs to start now.

“Our ministers and officials will be in touch during the coming weeks to tell you more about our ambitious plans, and to invite those institutional investors who are willing to make specific commitments to invest more in Britain’s long-term growth to join us at an Investment Summit in Downing Street in October."

Initial reaction to the letter has already begun to emerge, with industry experts highlighting concerns around the progress still needed to combat barriers to long-term investments, and the need for diversification.

AJ Bell head of retirement policy, Tom Selby, warned that whilst pension schemes might seem ideal candidates to support UK companies, “just because the PM and Chancellor click their fingers doesn’t mean pension investors will flock to illiquid investments in their droves”.

“The reality is that pension scheme trustees have a duty to invest members’ hard-earned retirement pots sensibly, considering various factors including risk appetite, cost and, increasingly, impact on the environment,” he said.

“Institutional investors also need to prioritise diversification when choosing how to put members’ money to work, both in terms of the type of company they invest in and the country in which it resides.

“Ultimately, the main job of pension schemes is to invest in a way that maximises returns for their members, not in the way the Prime Minister tells them to.”

Hargreaves Lansdown senior investment and markets analyst, Susannah Streeter, added: “Britain’s Prime Minister and Chancellor want to see a big bang of investment which would provide a slow burn of capital heat to propel Britain’s recovery from Covid and its long-term growth, but many institutional investors, and in particular pension funds, would argue the kindling needs to be laid first before the spark can take hold.

“That would include the removal of the cap on fees that DC schemes can charge to ensure they are not over penalised for over performance, and that does now appear to be in hand, with the DWP set on reforming this.

“The launch of the UK infrastructure bank should also help light the touch paper, to encourage joint investment in long term green schemes.

“But the biggest change is likely to come with the revving up of a new vehicle for investment management – the Long-Term Asset Fund - opening up possibilities of investment which until now have been restricted for UK pension funds.”

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