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The Association of British Insurers (ABI), representing the major pension providers, has suggested that the government should promote increased co-investment with private sector pension funds. This move would help unlock more retirement funds for the economy and make the UK a more appealing destination for ABI members. The ABI highlights that offering state support for riskier and illiquid investments could incentivize pension funds to invest in assets that align with wider policy objectives. By rebalancing risk and reward, these incentives would enhance value for savers and attract more schemes.
This recommendation is part of a report by the ABI to be published on Monday, coinciding with Chancellor Jeremy Hunt’s announcement of extensive pension reforms in his upcoming Mansion House speech. These reforms aim to encourage greater investment of retirement funds in the UK to boost economic growth. The ABI also urges the government to ensure that the Financial Conduct Authority (FCA) eases rules to facilitate retirement funds’ investment in riskier, illiquid assets such as start-ups and infrastructure. They propose collaboration between the FCA and the industry to ensure investment restrictions do not hinder firms from making such investments.
To enable defined-contribution pension schemes to invest in alternative assets like venture capital and private equity and expand their investment options, the ABI emphasizes the need to shift the current focus on costs to a value-driven approach. The current emphasis on charges limits the assets that providers can invest in, and a change in culture would empower these schemes to invest more widely.
According to the Pensions and Lifetime Savings Association (PLSA), UK pension funds, including both public and private sectors, invest nearly £1tn in the country. The government aims to encourage these funds to play a larger role in providing capital for business growth, promoting its “levelling up” agenda and supporting the green transition. The Labour party, currently leading in the polls for the next general election, also supports this approach.
It is crucial that any changes in pension investments are part of a long-term strategy developed on a cross-party basis. The ABI stresses the need for a comprehensive plan for pensions that transcends party lines. As an example of such a plan, the Labour party has proposed co-investing up to £8bn with private companies in green projects as part of its wider “green new deal” if it forms the next government. This investment would be channeled into the “National Wealth Fund” to attract greater private investment and accelerate the transition to a low-carbon economy.
In a separate initiative, the Lord Mayor of London, Nicholas Lyons, aims to secure a voluntary commitment from pension funds to allocate up to 5% of their portfolios to fast-growing UK businesses. He intends to announce this agreement at the Chancellor’s Mansion House speech.
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