Policy uncertainty and regulatory hurdles are preventing UK pension funds from investing more into UK productive assets, the Local Government Pension Scheme (LGPS) pool Border to Coast Pensions Partnership has warned.

Its report called on the government to provide policy certainty, remove structural blockers to investment, and incentivise growth-driving capital allocation to enable increased pensions investment into UK productive assets.

Border to Coast Pensions Partnership said there is a “significant” appetite for institutional investment in the UK, demonstrated by the fact that large pension schemes, including the LGPS, are already significant investors in the UK.

However, the report identified several barriers preventing further investment in the private equity funds that support British companies and in UK infrastructure.

It noted that key barriers for UK private equity include the statutory duty on pension funds to cap fees, which it said ignores the additional returns that investments with higher fees can deliver, and the underdeveloped UK-focused asset management ecosystem.

Given this, the report recommended that these barriers could be addressed through several solutions.

The first solution the pool suggested was clearer guidance from government and regulators on how pension schemes should assess value for money in their investments, with a closer focus on net returns.

The report also suggested that a government review of the role and resourcing available to the British Business Bank, British Patient Capital, and the National Wealth Fund could create a more effective, joined-up system that investors could easily navigate.

Another solution to address these key barriers for private equity the pool suggested was targeted tax and performative incentives, which it believes would build a stronger UK-focused asset management industry, and could particularly target growth equity to fill the capital gap for scaling UK companies.

In addition to this, it suggested that potential solutions include prudently addressing ‘safetyism’ in UK regulation and using tax to encourage UK-directed investment.

The report also noted that infrastructure investment is "held back" by the uncertainty created by the UK’s "complex" planning system and historical changes in government policy in areas such as the green transition timeline.

The report recommended that these issues could be addressed by a more stable policy environment, as well as further changes including the “rapid” passage of the Planning and Infrastructure Bill in a form that unblocks the UK’s planning system and decreases development risk.

It said this could be done by boosting transparency, reducing uncertainty over approval timelines, and tackling renewable grid connection delays “head-on”.

The report also suggested that UK National Wealth Fund and GB Energy “well-designed” catalytic initiatives could be launched to develop infrastructure to a point where private sector capital can step in.

It said these projects would reduce risks for private investors, making it easier for them to invest and support infrastructure growth.

The report also advocated for amendments to the tax regime to incentivise wider infrastructure investment, similar to the Contracts for Difference regime for renewable energy infrastructure.

The report highlighted that the LGPS is “well placed” to invest more actively in private markets such as infrastructure and private equity, given its long-term investment focus, strong funding position, and increasing scale as a result of the pooling of assets.

It noted that addressing these challenges could lead to more supportive investment conditions and enable the LGPS to have a bigger role in UK productive finance.

Therefore, the report findings add to the discussion on how pension schemes should be encouraged to invest in UK growth assets, as the government implements the reforms to the UK pension system identified through the Pensions Review.

Border to Coast CEO, Rachel Elwell, acknowledged that the UK is in a “fast-moving period of reform” with the government focused on mobilising capital, including the power of pensions to boost UK growth.

“The new planning framework is being debated in Parliament now, there’s a Pensions Bill on the horizon and long-awaited strategies are being cemented for the likes of industry, infrastructure, and skills,” she continued.

“The LGPS is already a significant investor in the UK, deploying a greater proportion of funds domestically than private defined contribution (DC) equivalents.”

She emphasised that if the government wants to “unleash the full potential” of the LGPS, and its £425bn of assets, it should continue its active engagement with the industry and take note of the current blockers outlined in this report.

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