Several UK pension fund industry officials have called on the UK government to remove certain ‘barriers’ to give way to an “investment Big Bang”.

The term – “investment Big Bang” – was coined in a letter published yesterday by the UK’s Prime Minister Boris Johnson and Rishi Sunak, the Chancellor of the Exchequer, in which the pair encourage UK institutional investors – including trustees and managers of defined benefit (DB) or defined contribution (DC) pension funds, insurance companies and advisors – to increase their investments to domestic assets.

In the letter, the pair said that over 80% of UK DC pension funds’ investments are in mostly listed securities, which represent only 20% of the UK’s assets.

Myles Pink, partner at consultancy LCP, said that a “investment Big Bang” would be “hugely welcomed” by UK investors, however, “this must be more than just warm words from government”.

He said: “Trustees are willing to invest for the long-term but need the government to remove the barriers to this type of investment and to help ensure there are suitable projects to invest in.”

Richard Butcher, chair of the Pensions and Lifetime Savings Association (PLSA), agreed.

“In an era, which has been characterised by low yields and low scheme member contributions, the PLSA and the wider pensions industry have consistently asked for steps to be taken by government and regulators to remove barriers and improve schemes’ access to a broad range of alternative investments, which may suit a pension scheme’s long-term approach,” he said.

The PM and Chanellor’s letter stated that “(I)t’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country”.

“It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country”

Boris Johnson, UK Prime Minister, and Rishi Sunak, Chancellor of the Exchequer

Gareth Mee, global investment advisory leader at EY, believes there has long been a valuable synergy between the asset return needs of pension funds – which are long-term, reliable, and inflation-linked – and the attractiveness of investing in large UK infrastructure, such as housing, transport and utilities.

“The challenge has always been how to make these assets accessible to pension funds with sufficient flexibility in order to manage complex cashflows, not least because many schemes are too small to justify or be able to invest directly into large and illiquid assets,” he noted.

Mee also highlighted that one of the main barriers to investment for pension schemes is the level of complexity, diversity, risk and reward of the potential investments, and this must be addressed.

He added: “The level of expertise and manpower needed is significant and particularly challenging for smaller schemes that don’t have the size of team to invest directly or to oversee the investments made. Greater consolidation in the market could help more schemes access these types of investment and therefore increase the overall levels of assets invested.”

PLSA’s Butcher also mentioned that “regardless of size, type or maturity of scheme diversification of investments” investing in illiquid and alternative assets can often be more complicated, more costly and more resource intensive.

“Where this is the case, such investments are rightly much less compelling value for money than alternative options, irrespective of their potential upsides,” he said.

Johnson and Sunak said that the new UK Infrastructure Bank is already open for business and is ready to co-invest in green infrastructure and support regional economic growth. The UK is also preparing to issue its first Green Gilt in September, allowing institutional investors to fund the government’s vital green commitments.

The duo said that for a “investment Big Bang” to happen it “will require a change in mindset for many investors that won’t happen overnight, but that is why this change needs to start now”.

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