Productive Finance Investment Funds

Published / Last Updated on 27/08/2021

Four leading finance industry lobby groups, namely the Pensions and Lifetime Savings Association, the Association of British Insurers, theCityUK and the Investment Association (IA) are looking for a change in regulation to entice more pensions schemes to invest in less liquid, longer term assets.

The four are collectively known as the Productive Finance Working Group with the term 'productive finance' being all about investing in longer term projects to benefit UK society and the economy as whole.

Since the year 'dot' investments have generally been made for shorter term growth and income goals rather than longer term.  The reality being that investing clients need to see early and continuous gains to stay encouraged rather than longer term 'horizon' goals.

In addition, the focus always appears to be on charges.  We all want things to be cheaper but there reaches a point where pension companies will stop offering products or reduce ongoing services if they have to reduce charges further.

Government wants this too:

Recently, Boris Johnson and Rishi Sunak recently wrote an open letter to finance institutions asking that they are better involved longer term projects.  These may range from larger infrastructure projects such as roads, motorways or rail links through to emerging sectors such as green energy, electric vehicles, carbon neutral projects, batteries, wind energy, social housing and more.  There are also proposals for a Celtic Bridge between Northern Ireland and Scotland as well as a rather ambitious Bridge/Tunnel link between Wales and Dublin.

Our view

This is a difficult game to play.  Asking institutional investors to invest more in long term 'productive finance' projects when pension scheme liabilities are immediate and can have an immediate impact on cash flow and liquidity will prove difficult.  In addition, capital adequacy for pension scheme liabilities is monitored and reported to HMRC, financial and pensions regulators regularly, so may be a change in the regulatory law will be required.

Investing in long term projects, with no guarantee of success or the rewards to take 20, 30 or 40 years is difficult when institutions are paid to make money for their investors.  The M6 Toll Road, north of Birmingham, has still not made any profit at all since it opened in 2003 due to high build costs but revenue is increasing now to £100m pa and may break into profit over the coming years.  In contrast, the Dartford Crossing (tunnel and bridge) made over £100m profit on £210m revenue in the year to March 2020.  That said, more than one third of that revenue was in penalty charge notices (PCN) where drivers had used the crossing but not paid, in the same way that you pay online for congestion charges.

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