UKSIF Sounds Alarm on Pension Scheme ‘Mandation’
Lack of policy certainty and large-scale projects is stunting institutional appetite for investments to catalyse UK’s net zero transition.
The UK Sustainable Investment and Finance Association (UKSIF) has cautioned the country’s government against mandating asset allocation by pension funds, arguing the move would be counter-productive without additional measures.
Last week, UKSIF launched a report which outlined recommendations on the behalf of its UK asset owner network and wider membership, representing more than 300 institutions managing over £19 trillion (US$25.1 trillion) in AUM.
The recommendations, which include delivering greater policy certainty and larger, investable projects to realise the country’s net zero transition objectives, have been published as the first stage of the government’s pensions review approaches its conclusion.
“UK investors want to make these long-term investments in environmental and social infrastructure, but they need a supportive wider environment for that vision to come about,” Oscar Warwick Thompson, Head of Policy at UKSIF, told ESG Investor.
Last July, Chancellor Rachel Reeves launched a Pensions Investment Review to foster investment, increase saver returns and tackle inefficiency in the UK pensions system. As part of this review, the government sought feedback on the introduction of mandatory asset allocation, which suggested schemes could be compelled to increase their UK investments.
UKSIF’s report argued that a ‘mandation’-based approach towards UK pension schemes presents “a number of clear, foreseeable risks” for funds, including reducing investment returns for members. It instead pointed to opportunities to mobilise higher levels of pension capital in the wider economy through greater policy and regulatory certainty, capitalising on the opportunities presented by the transition.
It added that mandation would neither help to boost the overall supply of investible projects in the UK for pension funds and investors, nor help the UK remain competitive in the ‘global race’ for capital.
In the UKSIF review, Newton Investment Management’s Sustainable Product Advocate Nico Aspinall said that without making underlying investments “more attractive” mandation would reduce returns for some pension scheme members.
Tricky transition
Rather than pension funds being unwilling to invest in UK-based projects, UKSIF said the lack of policy certainty and the insufficient scale of projects has prevented financial backing from institutional investors.
“The demand is there, but it’s about the lack of a pipeline of investable opportunities that can meet many of UKSIF’s pension fund members’ risk-return profiles,” said Warwick Thompson.
UKSIF’s members from the UK’s pensions sector representing more than £1 trillion in AUM.
As part of the Mansion House Compact in 2023, nine of the UK’s largest defined contribution pension schemes worth £400 billion in assets – including Aviva Investors, Nest, Phoenix Group and Scottish Widows – committed to invest 5% of their assets in UK unlisted equities, illustrating the willingness of institutional investors to finance domestic projects.
Launched since the pension review was initially announced, the UK’s National Wealth Fund and GB Energy are intended to provide investable opportunities for institutional investors and offer a vehicle to mobilise capital for the transition.
UKSIF’s report said that “clear and granular” decarbonisation pathways for individual sectors are key to effectively boost the pipeline of projects and support higher levels of private investment, as recommended by the Transition Finance Market Review (TFMR) and other stakeholders.
“There’s certainly more that we want to see the UK do to enhance its global status as a hub for transition finance,” said Warwick Thompson. “We’ve been very supportive of the TFMR report’s recommendations and fed into that quite closely alongside a lot of our members. Now it’s on the government to take forward the findings of that report.”
A Transition Finance Council has been established under the leadership of COP26 President Alok Sharma to boost the UK’s ambitions. But the government’s commitment has been questioned due to uncertainty over the introduction of mandatory transition plans.
David Russell, Chair of the Transition Pathway Initiative, said that there needs to be policy consistency for both companies and their investors to make long-term decisions to invest in low-carbon technologies, while also phasing-out carbon-intensive operations, “without fear that policymakers will water down their commitments”.
“The government should use its regulatory and other powers to encourage adoption of transition plans,” he added. “Corporate implementation of and disclosure around transition plans will provide pension funds and other investors with the information they need to identify those companies that are serious in their transition.”
UKSIF’s report said it would like to see transition planning implemented across the whole economy in a “proportionate and sequenced manner” during the coming years, including for large pension funds, as part of economy-wide UK Sustainability Reporting Standards based upon the International Sustainability Standards Board’s standards.
Consolidation considerations
The recommendations have been delivered ahead of the second stage of the government’s Pensions Investment Review, with an update expected ahead of Parliament’s summer recess which starts on 22 July. The government ran a public consultation for the review which closed on 16 January.
“We felt that sustainability has been a clear omission from the review to date,” said Warwick Thompson. “A key objective of this report is to elevate the importance of sustainability considerations and ensure that it forms a much bigger part of the upcoming second stage of the review. We have looked to make the clear case more broadly for policymakers and the review itself to realise the economic opportunities from the UK’s net zero transition.”
The UK government has looked to consolidate local government pensions scheme pools, with the two largest – ACCESS and Brunel Pension Partnership – last week told not to implement their transition plans and effectively instructed to merge with other pools.
Warwick Thompson said that increasing the scale of pension funds through consolidation “should help to boost UK pension schemes’ responsible investment practices, governance and ability to navigate sustainability risks and opportunities”, as well as reduce financial and non-financial reporting burdens.
However, he noted that having larger pension schemes won’t necessarily guarantee high levels of investment into the UK wider economy, if systemic investment issues are not addressed.
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