Call for UK to use co-investment with pension funds to drive backing for riskier assets

Receive free UK politics & policy updates

We’ll send you a myFT Daily Digest email rounding up the latest UK politics & policy news every morning.

The government should encourage greater co-investment with private sector pension funds if it wants to unlock more retirement cash for the economy, the trade body for Britain’s trillion-pounds savings industry has said.

The Association of British Insurers (ABI) — which represents the biggest pension providers — said state backing for riskier, illiquid investments would help make the UK a “more attractive” destination for its members.

“By developing further initiatives that use co-investment as an incentive, the government could create opportunities for pension funds to put more money behind assets that align with its wider policy objectives,” it said.

“For any investments that are expensive and/or riskier, such incentives would shift the balance of risk and reward, improving the value for savers, and making them more attractive to schemes.”

The recommendation was one of several in a report that will be published by the ABI on Monday. It comes as chancellor Jeremy Hunt prepares to outline wide-ranging pension reforms in his Mansion House speech next week that will include plans to encourage more retirement-cash investment in the UK to boost economic growth.

The ABI also called on the government to ensure the Financial Conduct Authority was allowed to ease rules to make it “as easy as possible” for retirement funds to invest in riskier, illiquid assets, such as innovative start-ups and infrastructure, outside of newly established Long-Term Asset Funds.

“Firms may wish to make specific illiquid investments outside of LTAFs, including the government’s proposed Long-term Investment for Technology and Science scheme,” said the ABI. “The FCA should work with the industry to ensure the permitted links rules do not constrain firms from making these investments.”

To “empower” popular workplace defined-contribution schemes to invest more widely in expensive alternative assets, such as venture capital and private equity, the ABI said the pension market must end its current “cost is king” culture. 

“As it stands, there is a stronger focus on charges rather than on the value a scheme provides for its members, limiting the assets that providers can invest in,” the report said.

UK pension funds — including both public and private sector, invest nearly £1tn in the UK through a mixture of UK shares, corporate bonds, government debt and other asset classes, according to the Pensions and Lifetime Savings Association (PLSA), a trade body for workplace pensions.

However, the government is keen for pension funds to play a bigger role in providing capital to areas that drive business growth, its “levelling up” agenda and the green transition. The opposition Labour party, which is leading in the polls ahead of next year’s general election, favours a similar approach.

The ABI said it was “vital” that any changes to pension investing were part of a long-term strategy for pensions, developed on a cross-party basis.

Indeed, Labour has already said that if it formed the next government it would spend £8bn co-investing with private companies in green projects ranging from battery factories to wind farms, as part of its wider “green new deal”.

The money will go into a central pot called the “National Wealth Fund” to encourage greater private investment into shifting Britain towards a low-carbon economy. 

Separately, Nicholas Lyons, the lord mayor of London, is hoping to realise his goal of securing a voluntary commitment from pension funds to invest up to 5 per cent of their portfolios in fast-growing UK businesses. He is looking to unveil a deal at the chancellor’s Mansion House speech.