Multi-pronged approach seeks to overcome the traditional reliance on overseas pension scheme capital
The UK government is assembling an increasingly complex institutional framework aimed at mobilising pension capital into private markets – but industry figures suggest the real challenge lies in persuading domestic schemes to participate.
A discussion at the Pensions UK Investment Conference last week on how government initiatives are supporting UK growth highlighted the growing web of organisations designed to connect pension funds with investment opportunities, including the Office for Investment, the British Business Bank and the National Wealth Fund. Yet the discussion also revealed lingering uncertainty about whether UK pension schemes will move quickly enough to meet policymakers’ ambitions.
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For the Office for Investment (OfI), the focus is on simplifying the relationship between investors and the state. Mark Nichols, senior investment adviser at the OfI, said the unit’s role is to act as a central point of contact across government departments for investors seeking to deploy capital in the UK.
“Our special power is the ability to convene,” Nichols said. “When investors deal with government they often have to talk to multiple departments that might have different objectives. We simplify that so there is a single front door.”
Originally created as a small unit to attract foreign capital, the OfI has expanded rapidly and now works across a broader set of initiatives designed to boost investment. These include the Strategic Sites Accelerator, which supports regeneration projects, and the Sterling 20 initiative, which aims to engage large pension funds as they expand allocations to private markets.
But attracting pension capital remains a central objective of the government’s strategy – particularly in areas such as venture capital where UK institutional investors have historically been underrepresented.
Leandros Kalisperas, chief investment officer at the British Business Bank, said the gap between the UK and other markets is stark.
“When you look at the US venture ecosystem, around 70% of commitments come from institutional investors, whereas only about 10% is the case for the UK,” he said.
The British Business Bank, a state-owned development bank, is the largest allocator to venture capital in the UK and has been tasked with encouraging domestic pension funds to participate more actively in the sector. Kalisperas argued that venture capital represents a significant opportunity for long-term investors.
“The opportunity for pension funds to generate increased returns from investing in venture is really significant,” he said.
Rather than mandating investment, the bank is trying to develop what Kalisperas described as a “choice architecture” that allows pension funds to access the asset class more easily, including new investment platforms designed for different types of schemes.
To help pension funds identify investable opportunities, the British Business Bank is launching VentureLink on 1 April, which will publish details of its venture fund commitments in an effort to address investor concerns about the lack of a visible pipeline.
Alongside the British Business Bank, the National Wealth Fund (NWF) is intended to play a complementary role by anchoring large infrastructure and industrial investments.
Eddie McAvinchey, the fund’s director for Scotland, said the institution aims to deploy around £20bn over the next five years while crowding in much larger volumes of private capital.
“What we need to do is find situations where we can crowd-in private finance – ideally pension fund finance – at significant scale,” he said, targeting a ratio of £3 for every £1 the NWF invests.
The fund’s strategy focuses on sectors aligned with government policy priorities, including clean energy infrastructure and regional economic development.
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However, the panel also acknowledged that UK pension funds have not always been the most active investors in domestic projects. In some cases, overseas institutions have stepped in where domestic capital has been absent.
McAvinchey pointed to a recent battery storage investment in the UK energy sector as an example. “We put capital into a battery storage platform, but the pension scheme investor was Aware Super from Australia,” he said.
Such examples illustrate the required structural challenge for the UK pension system. Overseas pension funds often operate at a much larger scale and have built extensive in-house investment capabilities that allow them to invest directly in complex assets such as greenfield infrastructure projects.
By contrast, many UK schemes – particularly smaller or mature funds – have traditionally relied more heavily on external managers and have been slower to develop direct investment expertise. The government’s expanding network of investment institutions is designed to address this gap by making opportunities easier to access and by sharing risk with private investors.
The speakers acknowledged that policy architecture alone may not be enough. For the government’s growth strategy to succeed, UK pension schemes will also need to develop the scale, expertise and risk appetite required to invest alongside the new institutions being built around them.