Major UK institutional investors have welcomed calls by the British government to invest greater amounts of domestic pension capital into the UK economy – and infrastructure, in particular – but have also highlighted the progress they have already made in investing in real assets in the country.

In an open letter, Prime Minister Boris Johnson and Chancellor Rishi Sunak called on the domestic pension fund industry to “seize the moment” and allocate more capital to “long-term UK assets”, such as infrastructure, to create a post-pandemic “investment big bang”.

Ted Frith, chief operating office of GLIL Infrastructure, the £2.5bn (€2.93bn) fund backed local government pension schemes and Nest, the government-established workplace pension provider, said: “The rallying cry for institutional investors couldn’t be more pressing. The UK has extensive infrastructure plans as the economy rebuilds after COVID and prepares for the future, but it can’t all be funded by the Treasury. That’s why pension funds will be a critical source of capital that will help realise those ambitions.”

GLIL, which has invested in UK infrastructure, including renewable energy, utilities, schools, hospitals, ports and trains, since its inception in 2015, has also been supportive of government efforts to launch a UK Infrastructure Bank.

“We’ve been beating this drum for some time and encouraging schemes to increase their allocations to infrastructure. It isn’t just about helping to create the high quality infrastructure we all need locally and nationally. Quite simply, infrastructure is an asset class with many of the qualities sought after by pension funds, including its long-term outlook, UK inflation-linkage, predictable cash flows and durable assets.

“It has worked exceptionally well for our pension-fund members who continue to support us with increasing capital commitments. I encourage those who haven’t yet done so to assess the opportunities being presented by these recent initiatives.”

Simon Pilcher, CEO of USS Investment Management, which manages the investments of one of the UK’s biggest pension funds, said: “USS is already an active supporter of the principles behind the Prime Minister’s ‘investment big bang’.”

He said USS was “a leading investor in the UK”, allocating about £33bn to domestic assets, representing roughly 40% of its entire portfolio. “Amongst UK pension schemes we are, by a distance, the biggest investor in private assets, with £23bn invested in private markets, almost half of which is invested in UK private markets,” Pilcher said.

“Our private assets include very significant investments in UK infrastructure assets as well as investments from across a wide variety of other sectors including in renewable energy. We are very heavily exposed to the UK economy through both our private assets as well as our public assets. Illustrative of our approach is a recent £295m investment in G-Network – a UK-based full-fibre broadband provider where our investment is enabling the rapid build-out of full-fibre broadband direct to thousands of homes across London and further afield.”

Darryl Murphy, managing director of infrastructure, at Aviva Investors, said domestic institutional investment in UK infrastructure had “readily been demonstrated over the past 20 years”. He said: “The amount of capital allocated to infrastructure has grown and continues to increase as institutions recognise the investment and ESG characteristics that the asset class delivers. It has been positive to see the commitment from the government towards infrastructure investment, which is critical to post-COVID recovery and the longer-term challenge of meeting our net-zero obligations.

“For private institutional investors, the March Budget provided a clear steer that private finance was going to be encouraged in the direction of energy transition and digital. We stated at the time that the relationship between the government and private investors must become even stronger. Investors are keen to engage and work more closely with the government to deliver the infrastructure the UK needs, for its long-term prosperity as well as the more immediate recovery from COVID-19. The formation of the UK Infrastructure Bank is a positive step-forward in this regard and we welcome the ability to work with the new entity to invest into critical new infrastructure.”

However, while large defined-benefit (DB) pension schemes have been making inroads into UK infrastructure, the market has been less accessible to defined contribution (DC) pension funds, which often lack the same level of scale and ability to invest in illiquid assets. In the open letter, the government pointed to figures that more than 80% of DC pension funds are invested mostly in listed securities, which represent only 20% of UK assets.

The government has been working to create a Long-Term Asset Fund and other measures to help DC pension funds invest in illiquid assets. In October, it plans to hold an investment summit at Downing Street.

Richard Butcher, chair of the UK’s Pensions and Lifetime Savings Association (PLSA), which represents the UK pension fund industry, said: “We support the government’s ambition to ensure pension funds have the opportunity to invest in the widest range of assets to deliver good outcomes for savers. In an era, which has been characterised by low yields and low scheme-member contributions, the PLSA and the wider pensions industry have consistently asked for steps to be taken by government and regulators to remove barriers and improve schemes’ access to a broad range of alternative investments, which may suit a pension scheme’s long-term approach.

“As the nation looks to build back better and accelerate the green industrial revolution, the government can play an important role in providing a pipeline of attractive investible opportunities and a regulatory environment that provides institutional investors with access to high quality, value for money products. Supporting innovation through measures such as the introduction of green Gilts and the Long-term Asset Fund, will also play an important role in facilitating capital investment in long-term infrastructure. If they can succeed at this, there is a real opportunity for a win-win here: an alignment of the national interest with the interest of pension-fund savers. 

“It is important to recognise, though, that the UK pensions sector, which looks after over £2trn of assets on behalf of tens of millions of savers is not homogenous. 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.”

Gareth Mee, global investment advisory leader at EY, said: “There has long been a valuable synergy between the asset return needs of pension funds – which are long-term, reliable and inflation-linked – and the attractiveness of investing in large UK infrastructure, such as housing, transport and utilities. The challenge has always been how to make 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. 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. For many DB pension schemes targeting a transfer to an insurance company, their time horizon would be much shorter and investment in illiquid assets doesn’t meet that timeframe. Greater flexibility over assets that could be used to pay insurance premiums could help bridge this gap.

“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.”

Nest, which manages the pensions of nearly a third of the UK workforce, is a DC pension fund and is leading the charge into private markets. Earlier this year, it hired Octopus as part of plans to invest £1.4bn in renewable energy over the next 10 years. Octopus co-founder Chris Hulatt told IPE Real Assets earlier this year he was seeing growing interest among DC pension funds for exposure to renewables. 

Today, Mark Fawcett, CIO of Nest, said: “Opening up private markets for long-term investors like pension schemes is a win-win. It allows schemes to access potentially strong, steady returns for decades, while helping to support economic growth and job creation that should ultimately also benefit our savers.

“At Nest, we’ve been steadily increasing our investment into private markets, which is set to continue further with our upcoming procurement into growth private equity later this year. We support the government looking at innovative ways to help other schemes access similar return opportunities.”

USS has also started to make its private-markets investments available to its DC members. “It is our scale, coupled with our extensive in-house investment capability, that has made it possible for all of our members to benefit from the attractive opportunities that we believe there to be in private market investments,” Pilcher said. “We have been able to do things that smaller pension funds will struggle to achieve.

“We share the government’s view that there is an opportunity to drive growth and prosperity by investing in the UK, securing the returns that will enable USS to pay the pension promises made to our 476,000 members. We expect to continue to have positive engagement with government and regulators as they seek to ensure there is an environment that encourages investment and fair outcomes for consumers as well as for all those saving for their retirement in the UK.

”To maximise the success of this initiative, it will be important for the government to ensure predictable, transparent and stable regulation of infrastructure assets. The pensions of our members will be paid over many decades, and USS must invest with the long-term in mind. Unexpected changes in regulatory frameworks and short-term perspectives from regulators significantly increase the risks of investment, making it more difficult for us to take advantage of the opportunities that exist in UK infrastructure.”

In response to the government’s open letter, Legal & General pointed to significant investment it had been making in housing and regeneration. Ben Denton, CEO of Legal & General Affordable Homes, said: “UK-based institutional investment can play a pivotal role in helping rebuild the economy as we recover from the pandemic. We welcome the government’s move to supercharge these efforts and Legal & General are – and will continue – to play our part in delivering on the government’s ambition.

“As a business, we have already invested £30bn in helping to build back better, and have added notable new schemes this year alone, forging partnerships with forward-thinking local leaders and institutions to level-up in line with local needs. Our new scheme ID Manchester, for example, will bring forward an ambitious, long-term £1.5bn innovation centre, creating 10,000 new jobs whilst helping to incubate innovative start-up and spin-out companies to drive forward the knowledge economy.

“In the housing sector, institutional investment has been a game-changer, with pension funds and other forms of patient capital now funding over 50% of new homes. Our affordable housing business, for example, will see its pipeline of homes top 7,000 by the end of year, whilst our commitment towards becoming net zero by 2030 makes L&G an industry leader in providing healthier and greener places to live.

“As highlighted by government, some barriers still remain in place for how institutions can deploy even further capital into large scale regeneration. In particular, removing blockages to allow DC pension savers to access higher returns via investments in innovative VC growth companies. We look forward to working with government to break these down so that we can deliver more investment and stand ready to participate in the investment summit to share ideas and best practice.”