Consolidation of UK Local Government Pension Schemes

In her recent Mansion House speech, the Chancellor of the Exchequer reassured City grandees about the government’s plans to consolidate local government pension schemes in the UK. The aim is to create eight “megafunds” similar to successful pension arrangements in countries like Australia and Canada.

With the UK holding the second-largest pool of pension assets globally, the consolidation is seen as long overdue. However, the impact of these reforms on listing regulations needs to be understood before evaluating the full effect of the consolidation.

The hope is that the consolidated funds will increase their exposure to UK equities, particularly in domestic start-ups. This would require improved access to companies at the pre-IPO stage, with regulators likely to support a greater focus on domestic equities by the new pensions cohort.

Currently, pension funds hold only 4.4% of their portfolios in UK-listed stocks, a significant decline from 53% in 1997 according to New Financial. Factors such as market globalization, digitalization, the search for global yield, and increased life expectancy have led fund managers to favor opportunities abroad over domestic equities.

It remains to be seen whether the consolidation and regulatory reforms will bring fund managers back to UK capital markets. There is a sense that the government’s focus is not solely on market conditions but also on securing funding for capital projects, particularly in the context of the ongoing energy transition.

Infrastructure Investments for the Energy Transition

The UK’s commitment to achieving net zero emissions by 2050 comes with a hefty price tag. The Office for Budget Responsibility estimates a net cost of £321 billion, with the need for both public and private capital to fund the transition. This mirrors the challenges faced by other European countries in securing additional funding for infrastructure projects.

Private investors are being encouraged to participate in infrastructure investments through equity or debt capital. This echoes the historical development of the UK’s railways in the 1840s, albeit with a focus on tangible benefits and sustainable outcomes.

Recent moves by investment giant BlackRock to expand its presence in private credit, including acquisitions of HPS Investment Partners and Global Infrastructure Partners, highlight the growing interest in alternative corporate lending. The global private credit market, valued at $1.5 trillion in 2021, is expected to double by 2028, with infrastructure debt fundraising becoming increasingly lucrative.

For retail investors, opportunities in private credit and infrastructure are expanding through vehicles like the UK’s Long-Term Asset Fund (LTAF) and the European Long-Term Investment Fund (ELTIF). These platforms provide access to long-term assets while addressing liquidity concerns associated with traditional structures.

As the DC pension market and retail channels play a more significant role in private credit and infrastructure investments, the opening up of private markets is poised to offer retail investors greater opportunities for diversification and long-term growth.