UK pension funds and other institutional investors have been urged by prime minister Boris Johnson and chancellor Rishi Sunak to back riskier long-term investments in the country as it recovers from COVID-19.
In a letter to the industry, Johnson and Sunak say that it's time for institutional investors to “seize the moment” and create an investment “big bang” by funnelling a greater proportion of their capital towards long-term UK assets – from pioneering firms to infrastructure.
They argue that UK institutional investors are under-represented in owning British assets, with over 80% of defined contribution (DC) pension funds’ investments in mostly listed securities, which represent just 20% of the UK’s assets.
By backing long-term UK investments, they say that “hundreds of billions of pounds” could go towards enabling pensions savers access to better returns, and support an “innovative, greener future” for the country.
“It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country,” the letter says.
“We 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 challenge comes alongside moves by the government to remove obstacles to long-term illiquid investment, such as setting up the UK Infrastructure Bank, and introducing flexibilities into the cap on fees that DC pension schemes can charge.
Ministers are also working with regulators to ensure a supportive regulatory environment, with the Financial Conduct Authority set to launch a framework for a new vehicle for long-term investment, the Long Term Asset Fund.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said that overseas pension funds are “far more likely” to benefit from long-term UK investments than their British counterparts, and that this is what the government is intent on changing.
“But many institutional investors, and in particular pension funds, would argue the kindling needs to be laid first before the spark can take hold,” she continued.
“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.
“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.”
Image credit: Stratos Brilakis/Shutterstock
Author: Chris Seekings