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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
It’s impossible for any government to please everybody. But UK chancellor Rachel Reeves should know that if you’re going to break some eggs, it’s best to actually make the omelette.
The UK’s threat to force pension funds to invest a specific percentage of funds in domestic private assets has good intentions behind it. An extra £50bn in funding would be equivalent to more than three times the total private investment in infrastructure in 2023. But too heavy-handed an approach would send a chilling message to investors and may not actually change much.
A group of large pension funds signed a pledge on Tuesday to increase investments in private markets, including real estate, infrastructure and private equity and credit. This so-called “Mansion House Accord” — building on an earlier compact from 2023 — is voluntary, but Treasury officials have said the government may force funds to change if they don’t make enough progress.
More investment in high-quality private projects could boost economic growth while also providing higher returns compared with, say, investing in fixed income — thus benefiting all parties. British private sector defined contribution pension funds are estimated to have just 3 per cent of assets invested in infrastructure, compared with 11 per cent for Canadian funds.
However, mandating certain types of investment without changing the conditions that made them unattractive is unlikely to help anyone. If the supply of projects remains static but UK pension funds have no choice but to invest, they will just drive down returns and crowd out other investors who have the freedom to move on to more attractive deals. The UK has a poor record of serving up investable infrastructure projects.
Scottish Widows, the pensions and insurance arm of Lloyds Banking Group, refused to sign up to this week’s accord. Even executives at some of the firms that fell in line are opposed to the notion of mandation, Lex has learned.
Investors in signatories such as Legal & General and Aviva should not be overly worried about the companies being forced into making bad investments. Their commitments are “dependent” on the government shepherding through a series of slightly fuzzy changes, such as providing a better pipeline of investment opportunities, that could potentially give pension funds a get-out.
In fact, the government is already working on several of these points. Examples include reforms to planning laws, starting a national wealth fund to help projects get off the ground and working on a “value for money framework” that would make it easier to compare the merits of different pension providers.
These sort of concrete initiatives deserve some credit. Getting public and private sectors moving in the same direction when it comes to infrastructure investment is a challenge. But bossing investors around is no way to build bridges, figuratively or literally.