National Service Versus Fiduciary Duty

Concerns raised over proposed National Wealth Fund as UK government struggles to fill seats at investment summit.

Less than a week after winning July’s UK general election, Keir Starmer’s Labour government unveiled plans for its National Wealth Fund (NWF), looking to combine public and private investment focused around five preliminary sectors.

The sectors – green steel, green hydrogen, industrial decarbonisation, gigafactories and ports – are to be backed by an initial £7.3 billion (US$9.8 billion) of public funding, with the objective of unlocking at least £20 billion in private sector capital, channelling blended finance investments into new sustainable infrastructure projects, boosting growth and job creation.

A fortnight later, Chancellor Rachel Reeves launched a pensions review to foster investment, increase saver returns and tackle inefficiency in the pensions system. As part of this review, the government issued a call for evidence earlier this month to inform its first phase. The document sought feedback on the introduction of mandatory asset allocation, suggesting schemes could be compelled to increase their UK investments.

The NWF focus sectors set out in a report from a Green Finance Institute-led taskforce can boost the UK economy and support the country’s net zero transition, according to Joe Dabrowski, Deputy Director of Policy at the Pensions and Lifetime Savings Association (PLSA), who describes the proposed investments as “much needed”.

Daisy Jameson, Policy Fellow at the Grantham Research Institute’s (GRI) Economic and Fiscal Policy Centre for Economic Transition Expertise at the London School of Economics, says the sectors are “critical to the clean growth transition” but rely on some “relatively nascent technologies”.

“Investments in these technologies are inherently risky for the private sector to take,” she adds. “In order to meet targets in the UK’s transition, the government can harness the NWF to deploy public funds and de-risk some of these investments for private sector investors.”

The risk facing private sector investors is a key reason for the NWF’s blended finance approach, which could make participation more attractive to pension funds. Last month, the PLSA called for the UK government to guarantee a stream of “high-quality” assets suitable for pension fund needs, including via the NWF.

Lacking clarity

Alongside the NWF, Labour has confirmed GB Energy, which involves public investment of £8.3 billion and partnerships with the private sector to develop renewable energy assets. The government has also introduced a variety of renewables-linked initiatives, including relaxing the country’s onshore wind policy, increasing the 2030 offshore wind target from 50 gigawatts (GW) to 55GW, and announcing plans for rooftop solar panels.

According to a report released earlier this month by the Capital Markets Industry Taskforce (CMIT), the UK nevertheless faces an underinvestment gap of around £100 billion per year, with new investments of £50 billion needed annually for energy alone. It also called for the NWF to invest in the “industries of the future” and help restore the UK investors’ risk appetite.

“Both the NWF and GB Energy could play a significant role in unlocking pension scheme capital for projects that are struggling to raise finance at this point in time, particularly for capital-intensive businesses such as renewable energy projects that are looking to scale up,” says Oscar Warwick Thompson, Head of Policy at the UK Sustainable Investment and Finance Association.

Pension schemes claim to be ready for the right signals from government. “A pipeline of opportunities and meaningful engagement on a project-by-project basis is the next step,” said a spokesperson for the UK’s largest pension fund, the Universities Superannuation Scheme. “Greater stability, long-term thinking and a growth mindset from regulators will give investors certainty and align investment horizons with the assets that need financing.”

To get the ball rolling, the UK will host an International Investment Summit on 14 October, bringing together up to 300 industry leaders to catalyse investment in the UK, with further details expected on the NWF ahead Labour’s first budget on 30 October.

Last week, Reeves met CEOs of BNY Mellon, Blackstone and CyrusOne in New York during a three-day trip to the US and Canada. She also met with former Bank of England governor and UN Climate Special Envoy Mark Carney, who was previously a member of the NWF taskforce, to discuss the development of the fund ahead of the summit.

While BlackRock CEO Larry Fink will participate , less than half of the 300 industry leaders who the government pledged would attend the event have accepted invitations so far.

Warwick Thompson says there is currently a “lack of clarity” on the entry point for pension funds into the NWF. “A consultation perhaps would be good because it’s a vital vehicle to potentially to mobilise capital for the transition. We would also like to see greater detail on the governance structure of the fund and how that’s going to work practically, also reconfirming the sectors to ensure they are same as the five sectors identified in the GFI launch report.”

GRI’s Jameson, meanwhile, calls for clarity on how the NWF will be treated under the UK’s fiscal rules, whether it will be ability to issue bonds and borrow from the markets, what its risk appetite will be, and how it will contribute to the UK’s clean growth targets.

Increased transparency is seen as one of the keys to increased inward investment. Research published last week by the City of London Corporation said the UK needs to develop a financial and professional services strategy to unlock as much as £7.7 billion in additional capital from foreign sovereign investors by 2030.

However, recent events may have dealt hopes for increased foreign capital a notable blow. It has been reported that in a meeting earlier this month, GIC, the world’s seventh-largest sovereign wealth fund, told the government it would not invest in regulated UK water, electricity and gas utilities due to unpredictable rules on infrastructure.

Government intervention

In this uncertain context, a question contained in the pension review’s call for evidence, which closes today, has raised concerns that the government could be considering mandating the allocation of assets from defined contribution (DC) schemes or those within the Local Government Pension Scheme (LGPS).

The question considers whether there is a case for establishing additional incentives or requirements aimed at raising the portfolio allocations of DC and LGPS funds to UK assets or particular UK asset classes. It also asks, with regard to LGPSs, if there are options to support and incentivise investment in communities contributing to local and regional growth and what those choices could be. While this would help funnel finance into the NWF’s focus areas, it risks infringing on fiduciary duty and negatively impacting the interests of long-term savers.

“On the face of it, it doesn’t say it’s mandatory asset allocation,” explains Warwick Thompson. “But if you read between the lines of what’s been put out in the call for evidence and what some ministers are saying publicly, there is the suggestion we are starting to move towards more of that approach.

“There are other wider barriers to consider, such as connectivity to the grid for projects, planning and permitting rules for projects, including renewables projects, and skill gaps limiting productivity,” he adds. “It’s not particularly effective if you mandate pension schemes or any investors to say you have to invest there. It’s about creating that a more attractive investment environment that can then get the supply of capital we think that is possible into the economy.”

A joint report from think tank New Financial and CMIT released earlier this month found that UK pension funds had allocated 4.4% of their assets to UK equities, down from 6.1% last year, with only Canada, the Netherlands, and Norway having a lower domestic equity allocation. This has been criticised by both the new Labour government and previous Conservative regime, despite the Parliamentary Contributory Pension Fund only having 1.3% of its £782 million of total investments allocated to UK equities.

As part of former Chancellor Jeremy Hunt’s Mansion House Reforms revealed last year, nine of the UK’s largest DC pension schemes worth £400 billion in assets – including Aviva Investors, Nest, Phoenix Group and Scottish Widows – committed to invest 5% of their assets to unlisted equities could boost allocations to green and impact investments.

Earlier this year, Carol Young, chief executive of USS, urged the government not to engage in excessive intervention in order to channel more retirement savings into British businesses amid public finance challenges.

PLSA Dabrowski stresses that pension funds’ freedom to direct their investment strategies should not be limited. “The review represents a unique opportunity to align pension fund investment strategies with the UK’s broader economic goals. But to be successful, reforms must ensure that the needs of pension savers remain at the forefront, while unlocking the potential for pensions to drive growth and innovation across the economy,” he adds.

“We support the NWF’s objectives, while cautioning against mandatory investments for pension funds,” says Lara Rutty, Director at ESG consultancy Canbury Insights. “Investments should align with savers’ long-term financial interests and objectives; avoiding disparity in access to commercial investment opportunities between pension savers and general taxpayers is critical.”

Investor incentives

The Association of Investment Companies (AIC), a UK trade association, recently proposed the establishment of government-sponsored investment companies, with the NWF acting as a cornerstone investor. These partnership funds could help advance the net zero transition, boost regional economic growth, and support new technology and innovation.

Creating several investment companies could mobilise private capital from investors with different asset allocation requirements and risk appetites. The AIC credits investment companies as being a tried-and-tested way of overcoming the practical challenges of investing in infrastructure and new technologies, with 353 investment companies traded on UK stock markets – 95 of which are among the 350 largest listed companies in the UK – managing a total of £273 billion in assets.

“Our proposals support the stated aims of the NWF and are compatible with the government’s ambition to attract private capital to invest alongside public funds,” says Nick Britton, Research and Content Director at the AIC. “To attract both domestic and international investment, we need to create the right environment.”

The UK should scrap stamp duty to simplify the tax system and “stop penalising UK investors for buying UK shares”, adds Britton, saying this is particularly important for investment companies which face a form of double taxation due to already paying stamp duty when they purchase UK assets.

Others suggest the government should stimulate investment via carrots not sticks, with Canbury’s Rutty calling for it to address liquidity requirements, while the PLSA’s Dabrowski recommended targeted fiscal incentives to further encourage pension fund investment.

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