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Pension fund investments and economic stagnation

It will take more than a ‘nudge’ for UK pension funds to adopt long term investment strategies. The Government must address the key barriers which prevent funds from embracing the uncertainty of genuinely long-term investments.

This is one of the central conclusions of ‘Take the Long Road: Pension fund investments and economic stagnation’, a new report by Dr Craig Berry, and published by the International Longevity Centre – UK (ILC-UK).

‘Take the Long Road’, supported by Speri, examines whether government efforts to reorient the investment practices of pension funds towards long-term infrastructure projects have been effective. The report outlines what we know about pension funds’ existing capital allocations, and focuses on different aspects of this policy area, including:

  • The agenda around increasing infrastructure investment.
  • The prospect of new forms of risk-sharing.
  • The role of regulation in shaping pension fund investments.
  • The issue of responsible investment and corporate stewardship.

Given the vast size of pension funds, it is not surprising that in a post-crisis environment, government should look to reorient their investment practice towards infrastructure projects, i.e. long-term investment.

Firstly however, the report questions whether the privatisation of social infrastructure via schemes like PF2 can be classified as ‘new’ investment, as these replace, rather than augment public investment in a climate of fiscal conservatism.

Secondly, while the coalition government and now the Conservative majority government have focused on encouraging, or ‘nudging’ funds to invest in infrastructure through initiatives like the pensions infrastructure project, this report argues that such measures fail to address the root causes of short-termism amongst pension funds.

The report proposes that whilst pension funds are both victims and perpetrators of economic short-termism, a number of structural barriers exist which prevent funds from adopting long-term strategies, including:

  • The strengthening of the regulatory environment around pension saving.
  • The need for liquidity in light of pension funds’ maturing memberships, and their proportion of pensions-in-payment.
  • The dismantling of risk sharing mechanisms within the UK pensions system.

Given the barriers to long-term investment identified by this report, a number of policy priorities are identified and proposals suggested. These include:

  • Defending defined benefit provision.
  • Making defined contribution provision operate more like defined benefit through the introduction of collective defined contribution.
  • Establishing national and regional economic renewal funds.

And most importantly, this report advocates the introduction of mechanisms for adjusting pension entitlements as pension scheme demographics change.

Authors: Dr Craig Berry

Download a PDF of the report below

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