Pension funds demand UK fiscal rule changes to spur investment

Investors who manage £1.7tn in assets have called on UK chancellor Rachel Reeves, to overhaul Britain’s fiscal regulations to unlock billions more pounds for infrastructure projects.

The group of Pension Investors, including Australia’s IFM as well as the UK’s Universities Superannuation Scheme, called on Reeves’ to redefine the key measure of debt in her Budget Rules. The UK government’s “public debt” should be adjusted to include the value of assets created through spending on green energy and infrastructure projects.

This would encourage the government to invest more in infrastructure and could unlock billions of dollars from pension funds, who prefer to invest alongside governments to reduce their risks.

“The UK government is actively discouraged from co-investing in pension funds by its own debt regulations. . . Gregg McClymont is the executive director of IFM. His UK investments include Manchester Airport Group, and Anglian Water.

The UK’s public sector net debt measurement does not take into account the value of the assets that the government invests.

McClymont stated that “public sector net debt actively discourages government co-investments since it treats each pound spent to acquire productive assets as the equivalent of a pound that is lost in the back of a sofa.”

The intervention joins a growing chorus calling for a new set of rules. Former cabinet secretary Lord Gus O’Donnell is also a vocal supporter.

Reeves said that she would stick to the rule that debt-to-GDP ratios must be projected to fall in five years. However, she hinted last month at the Labour Party Conference that she might be open to reforming debt definitions if they helped to encourage investment.

The group will be meeting Treasury officials on Tuesday to present a new plan for the UK to achieve its net-zero climate ambitions. A change in the fiscal rules is the main priority to encourage investment. Treasury officials were contacted for comment.

“We are delighted to be a part of this important blueprint. . . The policy options provide the opportunity to better align pension scheme interests and the capital of the pension schemes with the Government’s net-zero ambitions”, said Carol Young. USS invested in Heathrow Airport and the motorway service areas operator Moto.

The government wants taxpayers to benefit from new green technologies. It has announced that it will take stakes in Great British Energy, a state-owned company for energy investments.

As the rules currently stand, the money that the government spends on GBE is only treated as a liability in the balance sheet of the government, increasing the public net debt.

Pension funds are attracted to infrastructure and clean energy projects because they can provide a regular income stream.

McClymont noted that other countries, including those in the EU have avoided making large infrastructure projects a drag to fiscal rules by using an even narrower definition of debt.

“The capital investments that these economies enjoyed over the years compared to [the] UK is not likely unrelated [to] [the] fact [that] their national finance institutions. . . “We want to encourage people to invest in the long-term,” he said.

Next week, the government will host a summit on international investment in London. Reeves will be there along with Prime Minister Sir Keir starmer to promise to work together to fund projects that will boost the UK’s slow growth rate.