Pension funds call for UK fiscal rule change to spur investment

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Big investors in the UK have urged chancellor Rachel Reeves to revamp the country’s tight fiscal rules and help usher in pension investment “at scale”.

A group of pension investors with a combined £1.7tn of assets, including Australia’s IFM and the UK’s Universities Superannuation Scheme, are calling on the UK government to redefine the key debt measure used for its Budget rules.

They say the rules should be changed to recognise the financial value of assets created by government spending on infrastructure and green energy projects.

This would give an incentive to the government to spend more on infrastructure, and potentially unlock billions in extra future spending from pension groups, who prefer investing alongside governments to reduce their risk.

“The UK state is actively discouraged by its own debt rules from co-investing with pension funds . . . in infrastructure projects,” said Gregg McClymont, executive director at IFM, whose UK investments include Manchester Airport Group and Anglian Water.

He added: “Public sector net debt actively discourages co-investments on the government side of the table since it treats a pound spent on acquiring productive assets the same as a pound lost down the back of the proverbial sofa.”

The intervention adds to a growing chorus of voices calling for a change to the rules, including former cabinet secretary Lord Gus O’Donnell.

Reeves has said she will stick to the constraining rule that the ratio of debt to GDP must be forecast to be falling in five years, but hinted at the Labour party conference last month that she was open to reforming the definition of debt if it would help encourage investment. 

The group will meet Treasury officials on Wednesday to pitch a new blueprint for how the UK can achieve its net zero climate ambitions, with a change of the fiscal rules its key priority to stimulate investment. The Treasury was approached for comment.

“We’re delighted to be involved with this important blueprint . . . the policy options offer the opportunity of better aligning pension scheme interests and capital with the government’s net zero ambitions,” said Carol Young, chief executive at USS, which invested in Heathrow and motorway service area operator Moto.

The government has said it wants the taxpayer to profit from the success of new green technologies by taking stakes alongside private capital in Great British Energy projects, a new state-owned energy investment company.  

But as the rules stand, government money spent on GBE would only be treated as a liability on the government’s balance sheet, pushing up public net debt.

Infrastructure and clean energy projects are particularly attractive for pension funds because they provide a steady stream of income. 

Other countries, such as those in the EU, have avoided making the cost of big infrastructure projects a drag on fiscal rules by using a narrower definition of debt, McClymont said.

“The capital investment levels that these economies have enjoyed versus [the] UK over a long period of time is likely not unrelated to [the] fact that their national finance institutions . . . are incentivised to make long-term investments in the economy,” he added.

The government will host an international investment summit in London next week, at which Reeves and Prime Minister Sir Keir Starmer will promise to invest alongside the private sector on projects to boost the UK’s sluggish growth rate.