UK and Australian pension funds investing a total of £1.7trn in workers’ retirement savings have published their recommendations for carefully targeted policy action to unlock pension capital and contribute to the new UK government delivering on its clean power by 2030 mission.
Their key recommendation is to reform Public Sector Net Debt (PSND) by including the net worth of illiquid infrastructure investments for the first time. This comes against a backdrop of growing debate about the role of the UK’s fiscal rules in supporting capital investment, and the design of the new government’s flagship finance institutions, Great British Energy (GBE) and the National Wealth Fund (NWF).
Launched at a roundtable event in Westminster, the landmark blueprint – Mobilising pension capital for net zero: a policy blueprint for the UK – is a first-time collaboration between Australian and UK pension funds and the Pensions and Lifetime Savings Association (PLSA). The development of the blueprint was led by pension fund-owned asset manager, IFM Investors.
The group of signatories to the blueprint includes the UK’s largest pension fund, the Universities Superannuation Scheme (USS), its largest Local Government Pension Scheme pool, Border to Coast, and the UK’s largest defined contribution fund, Nest, as well as LGPS Central and the North East Scotland Pension Fund. From Australia, Aware Super, CareSuper, Cbus Super, HESTA, Hostplus and Rest are signatories.
Last year, IFM signed a Memorandum of Understanding with the UK government to invest £10bn into infrastructure projects by 2027 and is a founding member of the government’s British Infrastructure Council.
Gregg McClymont, executive director of IFM Investors, said: “Mobilising pension fund investment has the potential to create benefits for society, but quite rightly, pension funds have a fiduciary duty and must only invest in their members’ best interests. This world-first collaboration between some of the UK and Australia’s largest funds maps out how the government can accelerate the energy transition and deliver strong returns for working peoples’ retirement savings.
“There are a number of steps to unlocking this investment. But a pre-requisite is that the government should account for infrastructure assets more like a long-term investor, and less like a commercial bank holding equity as loan collateral to be sold in a fire sale.”
Other recommendations
The new UK government has made clean power by 2030 one of its defining priorities, and has expressed a desire to work with private sector investors to double onshore wind, triple solar power and quadruple offshore wind over the next six years. The government expects pension funds, both local and globally, to play a major role in financing the wider transition.
Funds, meanwhile, have a legal duty to prioritise the interests of pension scheme members, and need the right policy settings in place to facilitate their investment.
According to the blueprint, reforming the fiscal rules to treat unlisted productive assets as an asset could help incentivise long-term public investment in the net-zero transition, creating the conditions for NWF and GBE to crowd in pension capital at scale.
Mapping out a comprehensive set of pro-investment policy settings across finance, planning, renewable markets and industrial decarbonisation, the blueprint’s key recommendations to government also include planning reform, including incorporating the government’s legally binding emissions reduction targets in the National Planning Policy Framework, and fast-tracking the deployment of renewable energy through clearly-defined commercial objectives for GBE and longer-term Contracts for Difference to bring down the cost of capital.
Additionally, the blueprint urges the government to support industrial decarbonisation and emerging net zero industries by focusing the NWF on supporting the commercial development of higher-risk net zero industries and projects where it can play a valuable role in bridging gaps in capital markets
Nigel Peaple, chief policy counsel at the Pensions and Lifetime Savings Association, added: “Pension fund capital rightly flows to the assets its managers believe offer the best risk-adjusted returns for pension scheme members. This timely report by IFM aligns with recent PLSA policy recommendations which highlight how specific regulatory and fiscal interventions can attract pension fund investment to grow the UK economy and help the transition to net zero.”
