Pension reforms to unlock £50bn for businesses, but lack green focus
The Chancellor has introduced a set of reforms aimed at bolstering pensions, which could potentially unleash £50bn for high-growth businesses; however, the measures lack explicit connections to the green agenda.
The Chancellor’s Mansion House speech confirmed that reforms would be introduced with the aim to ensure better returns for savers through a new Value for Money Framework, which encourages pension firms to prioritise long-term returns in investment decisions rather than focusing solely on costs.
Supported by the Chancellor and the Lord Mayor, nine major UK pension providers have agreed to allocate 5% of assets to unlisted equities in default funds by 2030. If all UK pension schemes follow suit, this commitment could unleash £50bn of investment in high-growth companies by 2030.
Hunt spoke of his desire to create the world’s “next Silicon Valley”, transforming the UK into a “science superpower” that embraced technologies like AI to “make our country a force for good in the world”. However, the speech makes no explicit mention to green markets or the net-zero transition.
To ensure effective investment, the Chancellor has requested the British Business Bank to explore greater government involvement in establishing investment vehicles, while building on the existing £250m support through the Long-term Investment for Technology and Science (LIFTS) for industry-led investment vehicles.
Defined contribution pension schemes will further enhance retirement funds by up to 12%, approximately £16,000 for an average earner, through increased investments.
While the reforms aim to stimulate investment in sectors with “high growth potential” and long-term returns, the announcement does not explicitly mention green industries or establish clear connections between the pension reforms and their specific impact on green investments.
The UK has the largest pension market in Europe, with a value exceeding £2.5trn.
While certain leaders in the pension industry perceive the reforms as an opportunity to amplify investments in support of the net-zero transition, other professionals within the industry approach the reforms with caution due to the absence of explicit green ties.
Phoenix Group’s chief investment officer Mike Eakins said: “Currently, only 9% of UK pension funds are invested in alternative assets as compared to 23% in other major pensions markets. With the right regulatory environment, Phoenix Group could invest up to £40bn in sustainable and/or productive assets to support economic growth, levelling up and the climate change agenda whilst also keeping policyholder protection at its core.”
An analysis by Make My Money revealed that UK-based pension schemes hold more than £88bn in investments in fossil fuel companies, equivalent to approximately £3,000 per pension policyholder.
More than half of the assessed pension schemes include Shell and BP as top holdings. Shell recently rolled back its targets to reduce fossil fuel production, while BP acknowledged that it is unlikely to meet its previous commitment of a 40% reduction in oil and gas production by 2030, based on a 2020 baseline.
Gresham House’ managing director of sustainable infrastructure Peter Bachmann said: “These reforms will empower UK pension funds to invest in the types of solutions that can play a key role in tackling society’s biggest challenges, from biodiversity loss to food security. Private capital and long-term thinking are desperately needed to address the climate and nature crises, and our pensions industry now has the power to do so.
“While the situation with Thames Water rightly brought additional scrutiny over the proposed changes in the run-up to the chancellor’s speech, preventing pension funds from investing into all types of infrastructure assets is not the solution.
“For the UK to prosper environmentally, socially and financially, we need to invest in infrastructure focused on the green transition. These reforms will enable UK pension funds to lead the way.”
The voluntary commitment to allocate 5% of pension fund investments to early stage businesses could be a welcome boost for SMEs in the UK, with the Government suggesting that £50bn in funding for start-ups could be generated by 2030.
A recent BSI survey found that half of UK SMEs do not yet have a net-zero plan or policy. Moreover, only one-fifth of SMEs are measuring and reporting progress to cut emissions in a standard way.
Some believe that the new proposals should do more to tie-in climate-focused targets and support for SMEs.
Seahorse Environmental’s Katie Davies said: “The Government’s proposals are welcome and much-needed for start-ups, but the absence of any climate-related commitments is a missed opportunity.
“Greening the financial system is an increasingly urgent and unavoidable reality, with SMEs facing some of the toughest barriers to overcome. The road to net-zero requires a holistic approach; we cannot afford to leave behind a sector which constitutes 99% of the UK’s economy.”
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