Policy Exchange, a UK think tank, has published a new paper – Unleashing Capital – setting out policy and regulatory challenges facing UK pensions and insurers to invest in productive private market assets and calling for reform of the Solvency II directive.

The report – sponsored by Phoenix Group – stated that out of the seven largest pension markets (P7*), the UK invests least in productive assets, and the UK insurance sector, compared to insurers on the continent, is near the bottom of the table when it comes to investing in private equity and infrastructure.

To address this problem, government must urgently reform both Solvency II and the defined contribution (DC) pension market, pushing consolidation in pensions to encourage investment in alternative assets, Policy Exchange said.

Alternative assets, particularly infrastructure and private equity, can generate strong returns over long-term horizons, and are ideal for institutional investors. Canadian funds in particular have managed to mitigate inflation risk by investing heavily in infrastructure, the paper showed.

The report – which includes a foreword written by Tony Danker, director-general of the Confederation of British Industry (CBI) – suggested that the UK is sitting on some of the largest pools of capital globally and could do more to mobilise these pools for investment in growth businesses, infrastructure and other productive assets in the UK.

Connor MacDonald, head of economics at Policy Exchange and author of the report, said: “UK pension schemes have assets second only to the US, and the UK’s insurers have the fourth largest turnover in the world. Yet, UK pension funds and insurers do not invest as much in productive assets as their international counterparts, meaning that UK businesses, communities and projects are missing out on huge pools of UK capital. This is not ideal for investors, for policyholders or for UK economic growth.”

The report stated: “Urgent reform is required so that the government can push for better regulation, more consolidated pension markets, more powerful local governments, and more collaborative national institutions to create investable projects for capital to move to.”

The paper set out why government needs to adopt reforms to the Solvency II framework through the Financial Services and Markets Bill, and by working with the regulator.

Additionally, on the consolitation of the DC market, the report suggested potentially consolidating the Local Government Pension Scheme (LGPS), so that it can better invest in productive assets, similar to models operated by Dutch and Canadian pension schemes.

The report proposed four strategic prirorities: creating a better regulatory environment, making a better pension market, empowering stronger local government, and building more collaborative national institutions.

In his foreword, Danker said: “Unleashing Capital presents some practical and highly relevant ideas – ideas that should challenge government and policymakers to think about growth differently. It’s this kind of radical thinking that can help shake the UK out of its low-growth state and kick-start the next wave of investment, prosperity and productivity.”

MacDonald added: “The UK can do more to ensure insurance and pension markets are well regulated, but that cannot be the end of the conversation. Local and national institutions must become better partners with institutional investors, to catalyse private investment in businesses and communities.”

* The P7 include Australia, Canada, Japan, The Netherlands, Switzerland, the UK and the US

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