First published in Professional Pensions on 6th June 2019
I was disappointed to see an overly simplistic “pensions should be harnessed to…” sort of message from Guy Opperman in The Times on 22 May. It’s great to see pensions being discussed amid the wider political context we are in, but I found the sentiments, however well-intended, quite wide of the mark. Particularly the fact that it gets the key issue exactly backward: there IS plenty of demand from pension funds to invest in, for example, renewable infrastructure (I see plenty of examples first-hand). The issue is the supply of assets at the right risk/return levels, and how competitive it is now among buyers for these assets in the global investment marketplace, especially with the presence of levered buyers in bidding processes who push up prices.
Any engagement with pensions to further government or social goals needs to first acknowledge four key things: The core mission of pension funds to be reliable payers of retirement incomes, the significant difference between defined benefit (DB) and defined contribution in this regard, the difficult role that trustees have, and the tricky balances they must strike in fulfilling it. Sweeping statements that co-opt pensions to fulfil wider government aims while failing to recognise the actual issues at hand are just grandstanding, and could well be counterproductive.
Now let me be clear – I am absolutely in favour of pension schemes having the ability to invest in assets like renewable energy or social housing, while finding creative ways to engage their members more. I have written previously about a new movement in the wider industry toward asset owners choosing to take responsibility for the externalities associated with their portfolios, and a wider social compact that I believe is beginning to support fiduciaries weighing non risk/return factors when making allocation decisions. This is all happening already and, in my view it could be quite unhelpful for the government to attempt to regulate to force more demand.
The right answer in my view is to be found in basic capitalist economic principles (the minister and I can agree on that much), but on the supply rather than the demand side. If the minister truly wants to see these issues addressed then he would start by understanding the objectives of different types of pension funds and what they want to invest in, and then investigate ways to incentivise the development and bringing to market of a steady supply of the sort of assets and projects that pension schemes have an appetite for. If this were to happen, I have every confidence there would be large amounts of demand from pension funds. It has long been observed in the industry, for example, that certain types of infrastructure and social housing assets have characteristics that make them suitable for maturing DB schemes. However, the price has to represent the right risk/return balance and the availability needs to be sustained over a period of time to suit the decision making cycle of the institutions concerned.
I for one believe that managing a clean energy transition and tackling housing are key issues for our future, and I welcome a productive conversation around the role that private capital (including pensions) can play in this. But to move forward we need clearer thinking, and a firmer grounding in practical reality than the minister demonstrated in the column. My colleagues and I would be happy to be available to the minister and others to share insights on our clients’ needs and expand further on these points.
First published in Professional Pensions on 6th June 2019