Andrew Kail: The opportunity for the DB sector to contribute to the productive growth agenda is vast
More than 10 million people in the UK will rely on defined benefit (DB) pensions for part or all of their retirement and these DB pensions will stretch decades into the future. I strongly believe that this capital has a crucial role to play in catalysing UK economic growth.
Whether it is making progress with urban regeneration, meeting the need for 145,000 new affordable homes per year[1] or hitting clean power targets for 2030[2], the UK is facing shortages of crucial infrastructure across society. It is therefore not a surprise that the way in which pension schemes and insurers invest has created such headlines in recent years.
The recent signing of the Mansion House Accord and progress with the Pension Schemes Bill are just two examples of how the UK government is encouraging investment into productive finance – defined at Legal & General (L&G) as deploying society's capital to drive purposeful and productive investment.
An obvious but sometimes overlooked point within the current discourse is that these investments don't exist in a vacuum. They need to be originated, manufactured, and developed. To deliver the social outcomes and economic growth desired, there needs to be both greater long-term investment overall, and partnerships between the private sector and those stewarding society's pensions and savings.
This is where the pension risk transfer (PRT) market and insurers can play a key role. For the vast majority of DB pension schemes that we speak to across L&G, buying out with an insurer remains the gold standard when it comes to securing members' benefits for the long-term. This is the reason we are seeing schemes do so in greater numbers every year. It frees up sponsoring employers to focus on growing and reinvesting in their own businesses or even supporting their DC schemes.
Recent research by Barnett Waddingham showed that between 2012 and 2023, FTSE 350 companies paid £161bn into their DB pension schemes[3], which is roughly equivalent to 20% of all dividends paid.
Insurers in the PRT market typically invest 20-50% of premiums into ‘direct investments', including in areas such as housing, infrastructure and clean energy. Recent data from the Association of British Insurers[4] bears this out, showing that UK annuity providers have already invested around £178 billion into productive investments, with nearly two thirds of their total investments in the UK economy. This means that the expertise to originate and develop these assets sits naturally inside insurance companies. Moving pension scheme assets to an insurer is thus likely to unlock significantly more funds for much-needed investments, than if the assets remain within the schemes.
Considering LCP's well-recognised forecast of £40-50bn[5] of buy-ins per annum, our analysis suggests that over the next ten years, the PRT industry will be able to invest over £100bn in additional productive assets. We are in a position where we can invest our own balance sheet capital alongside the debt in major infrastructure projects. This helps to drive finance into areas of society that need the capital, while also generating the cashflows necessary to pay members' pensions. Conversely, it provides a significant intergenerational benefit where the savings of the older generations are financing new housing and infrastructure, the transition to renewable energy and university-led innovation and research.
These investments can play a tangible role in enabling regional and national growth by meeting place-based needs – for example, L&G's £1bn commitment to Cardiff to regenerate the city centre; our £350m collaboration with Newcastle University and Newcastle City Council to build the cutting-edge Newcastle Helix; and our £4bn joint venture with Oxford University to develop housing, academic facilities, and science and innovation districts in and around the city. I take great pleasure in walking around these developments and talking to the people who are working and living in the places that our pensions transactions have funded.
With over £1trn of DB pension scheme assets sitting on UK company balance sheets, the opportunity for the sector to contribute to the productive growth agenda is vast. Far from being a legacy of the past, DB pensions are playing a crucial role in helping to drive the UK's future prosperity.
Andrew Kail is CEO of institutional retirement at L&G
