Ros Altmann: How we can use our pension funds to build a better future for the economy

In fact, there is a potential source of money that might be used here – pension funds. The UK has more money in funded pension schemes than all the rest of Europe put together. There are hundreds of billions in private pension schemes and, although most public sector pensions are unfunded, local authority schemes have £140bn of assets set aside for future pensions.

Why not use some of this money to fund the infrastructure projects that our economy urgently needs?

There is a tremendous opportunity to think more creatively about pensions and start to turn bad news about pension shortfalls into potentially good news about economic stimulus.

In Yorkshire, for example, projects such as the electrification of the trans-Pennine Express from Manchester to Leeds, or even the HS2 high-speed rail network, will boost the local economy, and facilitating local pension funds (and others) to fund these projects, would produce money for these projects to more easily proceed.

UK pension funds have suffered serious damage from recent policies to stimulate growth – in particular low interest rates coupled with quantitative easing (QE) have caused significant increases in pension liabilities further compounded by the sharp rise in inflation in recent years.

As their deficits have ballooned, pension funds have been trying to adjust their investments to reduce risk by investing in bonds, but this might prevent further sharp deterioration, but it cannot overcome the deficits.

Pension trustees are desperately looking for ways of boosting their returns in order to plug their funding gaps. They have invested billions of pounds in overseas stock markets, commodities and hedge funds, but these alternative investment asset classes are not going to benefit the UK.

Some schemes have also invested in infrastructure funds, but these have high fees and invest largely in overseas infrastructure rather than the UK, whereas investing directly in UK infrastructure projects could benefit both the funds themselves and the economy.

So, on one hand, Government policy has badly damaged pensions, local authority and private company pension funds desperately need better returns, we need to stimulate the economy and UK infrastructure urgently requires modernisation but Government cannot afford big projects.

On the other hand, pension funds need long-term inflation-linked returns and have billions in assets. Surely, then it makes sense to harness the power of pension fund assets to boost long-term growth potential and boost pension fund returns?

Recent estimates suggest that, although local authority pension schemes have £140bn in assets, they actually need £220bn to pay all the promised pensions, so they clearly need extra returns to help bridge this gap.

If the schemes cannot earn the extra £60bn to return to full funding, Government would have to bale them out and make up the shortfall anyway. Therefore, the Government has a direct rationale to help these pension funds invest in domestic infrastructure projects, which could generate potentially better returns than conventional assets while also helping long-term domestic economic growth. This could be a win-win for all.

As the Government would have to underpin local authority pension deficits anyway, it even makes sense for Ministers to incentivise public pension funds to invest in UK infrastructure projects.

Incentives could include underwriting future inflation-linked income streams, to provide pension trustees with a realistic alternative to long-term inflation-linked gilts (which are currently in such seriously short supply).

Infrastructure vesting potentially provides an ideal type of return profile for pension funds – especially if returns are underwritten by the Government. Indeed, local authority pension funds already invest an average of one per cent of their asset in infrastructure funds, but using funds incurs higher charges (and therefore lowers potential returns) and investments are more overseas than in the UK.

By helping pension funds invest directly in UK infrastructure projects – with the Government helping put together a diversified experienced management structure and also underwriting some of the long-run returns – pension assets can directly boost UK growth while also helping their own funding position.

This investment stream can help growth and reduce the fiscal deficit, and will be far cheaper for Government than having to spend billions in future on filling public pension fund deficits.

Of course, the case for boosting infrastructure investing also applies to private sector pension funds.

Even though the Government is not liable to fill private sector deficits, there is still a strong rationale for helping improve private sector scheme returns while also harnessing the power of their money to boost infrastructure and growth.

Providing a dedicated pool of projects for pension funds to invest in, with some underwriting of long-term returns (say guaranteeing an inflation-linked income stream in 10 years’ time) should provide attractive diversification to pension trustees and also help employers struggling with their deficits.

Infrastructure could be a win-win for all of us. I hope we can make it happen.