June 2020

Will pensions savings fund the infrastructure gap?

With the Government’s plans for infrastructure investment under threat as a result of the Covid-19 pandemic, could the UK’s pension pot fund the nation’s infrastructure gap?

Granddaughter playing with wooden block and granddad watching

In the Government’s 2020 Budget, record investment was promised for British infrastructure. More than half a trillion pounds (£640 billion) was pledged over the next five years, including £27 billion to improve transport routes, £12.2 billion to build more than 200,000 affordable homes and £500 million to support the rollout of a super-fast electric vehicle charging network. 

But then came the COVID-19 pandemic. The Government has prioritised underwriting parts of the economy and providing payments to support businesses and individuals, which has led to a debt which will likely take generations to pay off. 

But, as we look forward to economic recovery, we need to consider who will pay for the infrastructure projects that the country still desperately needs, and for which a significant amount of long-term capital will be required. 

The UK’s pension pot

An increasing number of companies are de-risking their Defined Benefit (DB) pension schemes through what’s known as Pension Risk Transfer (PRT). This is where a pension scheme transfers the risks, assets and liabilities of their fund to an insurer, like us, to secure some or all of their members’ retirement benefits. We use these pension funds, along with our balance sheet, to invest in assets that will deliver long-term returns, such as infrastructure, and pay the scheme members’ pensions for many years to come.

The UK is already facing a £1 trillion infrastructure-funding gap”

We believe long-term investors like ourselves have an important role to play in delivering regeneration, housing, transport, renewable energy investments and creating new jobs. In other words, the infrastructure gap could be filled, at least partially, by the UK’s pension pot.

The UK is already facing a £1 trillion infrastructure-funding gap – and that’s before we consider how the Covid-19 pandemic could affect government plans for investment. But with £1.6 trillion of DB pension assets on UK companies’ balance sheets, and with the UK PRT market having the potential to reach £770 billion in the next ten years (according to the Pensions Policy Institute), we predict between £150 to £190 billion of DB pension funds could be invested into UK infrastructure over the same time period. 

What does infrastructure development really look like?

Infrastructure investment isn’t just about the financial numbers – it’s about creating real things that help provide jobs and connect our country. For years, we’ve been using pension funds and our own balance sheets to invest in infrastructure – £26 billion to be exact. We’ve entered into a £4 billion partnership with the University of Oxford to build better research facilities, more housing for academics and better infrastructure for the city’s people. We’ve invested £150 million into Sheffield’s West Bar Square development, which will provide much-needed office space for 1,800 workers and 350 Build to Rent homes. We’ve invested £1.3 billion in clean energy infrastructure, including wind farms. And that’s not to mention our investments into projects in Bristol, Cardiff, Salford and Cheshire – all of which aim to regenerate cities through the development of infrastructure and help towards creating a strong economy for us all.

Building a better society

Even though most DB schemes are now closed to new members and/or future accrual, the number and size of PRT transactions are increasing. The sector transacted £24.2 billion in 2018, and 2019 broke the record again, with over £40 billion worth of deals agreed. 

We believe investing these pension funds can create a virtuous circle of older UK savers funding infrastructure assets that provide a public service, increase the productivity of the wider economy and generate the right level of returns to fund pensions – therefore creating a better society, and future, for all of us. You can read more about this in our report called 'The power of pensions'.

But to realise this, we are calling for a number of changes, including a renewed government commitment to collaborate with the private sector in delivering what we call ‘midi-projects’ across the UK. These are worth between £100 million and £1 billion and, while smaller in value than headline projects such as HS2, can have a huge societal and economic impact all over the country. With a range of midi-projects available for insurers to invest in, we can help drive growth and help plug the infrastructure investment gap. 

Granddaughter playing with wooden block and granddad watching
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