Over-complicated pensions are wasting UK growth potential
The UK pension industry has the potential to significantly influence economic growth – so let’s do it, says Phoenix Group chief investment officer Mike Eakins
It is no surprise and it isn’t earth shattering to say that further investment into UK infrastructure is needed to achieve economic growth. The UK grew 0.1 per cent according to the latest ONS and Rachel Reeves is demanding more of her own ministers. Only last week she stated they must start saying “yes” to new projects, go “further and faster” to boost the economy and proposed plans to ease restrictions on how some pension schemes are managed to unlock £160bn of investment in a push for growth.
This is imperative as the UK needs to upgrade its critical infrastructure to benefit society and public services are desperate for investment across the whole of the nation. Something needs to change to allow this to become a reality.
The pensions and insurance sector need to work together with the government to focus on getting UK pensions capital flowing into productive assets, generating stable returns and working collaboratively with that outcome in mind. No one should be satisfied until that outcome is achieved.
How can the pension industry spur growth?
Pension and insurance companies can play a pivotal role by allocating billions of pounds of capital to projects such as housing, transport, renewable energy and digital infrastructure. With more than £5 trillion in assets under management, the UK pension industry has the potential to significantly influence economic growth and development whilst improving returns for customers.
These investments not only offer potential for stable, long-term returns, but also contribute to the nation’s economic resilience and growth agenda. However, currently only 14 per cent of assets under management across the industry are invested into productive assets such as growth, equity and infrastructure. Using a much narrower definition that extends only to private equity and alternatives, the share drops to six per cent. These investments benefit the economy massively, and therefore this percentage needs to increase.
The pensions and insurance industry has traditionally had a conservative investment strategy, often missing out on higher returns available in private markets. Embracing a more dynamic investment approach can unlock substantial capital for domestic projects. For example, we are committed to investing £250m over the Long-Term Investment for Technology and Science (LIFTS) initiative to create an investment vehicle available to pension schemes and institutional investors to invest in UK companies focused on science and technology.
Why the UK is an outlier
Additionally, the UK is an outlier compared to other equivalent nations in terms of the number of pension funds that exist and their relatively small scale. We have one of the highest levels of investable pension wealth, but this advantage is squandered by having it split up between thousands of arrangements. The diffuse nature of the market largely exists for historic reasons and the industry should not be afraid of change. Bigger funds can function in a more sophisticated manner, competing with the very biggest investors for growth opportunities and using their scale to extract the best terms. We are fully supportive of the government’s proposal for minimum AUM thresholds.
Last year, in partnership with Schroders, we launched Future Growth Capital (FGC), the first private market investment manager to be established in the UK to promote the objectives of the Mansion House Compact. Over the next three years, FGC will aim to deploy up to £2.5bn from Phoenix Group, in line with our Mansion House Compact ambition. FGC will invest in the UK’s businesses of the future, providing the long-term financing they need to grow and remain in the UK. In tandem, it will unlock investment opportunities in private markets for millions of new pension savers to benefit from the diversification and investment return opportunities that unlisted assets can offer.
The National Wealth Fund can help
With these new types of investments in private market and productive assets, the National Wealth Fund (NWF) will also have a key role to play in how they are structured. That is best done as a real-time, engaged conversation with the NWF and the PRA having open lines of communication. The PRA needs to be advising businesses and the NWF as to which investments it might allow so the NWF can then invest and crowd in other SII regulated investors. This would help solve the issues we currently have, boost investment across the UK and improve the UK economy and its growth as a result.
Progress has been made already but there is much more work to be done. However, the prize is well worth it if our customers end up with a better outcome in retirement, infrastructure across the UK dramatically improves and we see a growing UK economy as a result.