Institutional Asset Manager Newsletter 12.04.24

Sun shines on DB funding levels

GBP 1.2 trillion could be up for grabs for UK defined benefit sponsors in the next decade if "extremely optimistic" funding projections materialise alongside changes to legislation that would let companies get their hands on scheme surpluses.
The figures come from research published by investment manager Van Lanschot Kempen this week that even under a conservative forecast find improvements in DB scheme funding levels in since September 2022 could deliver GBP500 billion in the following years.
Yet under the Pensions Act 2004, this money would be inaccessible since the law prohibits returning surpluses to sponsors.
No surprise then that the government, which has its eye on DB assets as source of funding for its green transition and levelling up projects, is considering whether to amend the law to make it easier for DB scheme surplus to be shared with employers.
A Department for Work and Pensions (DWP) consultation ends this month and will look at whether surplus can be invested in "productive asset allocations", which it describes as those that further growth and "make an important contribution to the real economy".
Given the targets to be net zero by 2050 and the wider levelling up ambitions, GBP1.2 trillion could come in very handy. However, while the sun may be shining on DB funding levels today, it is hard to forget the many years in which these schemes were in deficit.
Any changes to legislation, and the subsequent decisions by trustees about what to do with surpluses, must focus on members. It is also worth remembering that that Pension Protection Fund (PPF) - which features in the DWP consultation as a potential consolidator of small DB plans - only exists because employers collapse and their schemes fall with them.
Staying with levelling up, we also bring you an article from Octopus Investments which argues that affordable housing a sensible destination for institutional investors with a social investing objective.
Jack Burnham, Head of Affordable Housing at the firm, tells us that in 1968, the poorest quarter of the UK population spent 9 per cent of their income on housing; in 2021, it was 21 per cent.
"The government has a crucial role to play but it cannot tackle this challenge alone. Private investment is needed across the UK to raise living standards and wellbeing nationwide," Burnham writes.
While listing numerous advantages to including affordable housing in an ESG strategy, Burnham says investors should still tread carefully, "fulfilling their fiduciary duty obligations, as well as commitments to social and environmental change".
Definitely a warning worth noting given the potential direction of UK pension policy.

Gill Wadsworth, Editor
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