The UK Pensions Scheme Act, which became law in April, seeks to reinforce the consolidation of a fragmented pensions industry to improve outcomes for savers and, potentially, direct more institutional funding into under-invested areas of the economy.

That could herald greater institutional investment in impact funds and other impact-related investment vehicles, but it remains unclear how effective the act will be in achieving that.

One headline measure is the creation of multi-employer, defined contribution (DC) megafunds of at least £25bn (€28.9bn), which, it is hoped, will reduce operating costs and enable investment in a wider range of assets, including vital infrastructure.

The act also seeks to build on the continuing consolidation of Local Government Pension Scheme (LGPS) assets into investment pools – another move intended to improve performance through economies of scale and deepen in-house expertise as well as supporting long-term investment in local infrastructure, housing and clean energy.

The legislation’s final form is the product of extensive discussions between the pensions industry and government over the nature and speed of the sector’s overhaul and the best way to direct more investment into critical infrastructure and under-invested economic sectors.

Impact considerations

“I think you could probably argue it both ways when it comes to what the act means for impact investing,” Laasya Shekaran, head of community at UK industry body Investors for Purpose told Impact Investor.

Shekaran said this was a challenge that could partly be surmounted by expanding the number of larger fund-of-funds impact vehicles to create the scale needed to accommodate larger investment sizes.

Another measure in the act that could unlock impact-related investment is the greater flexibility being granted to defined benefit (DB) pension schemes to release their surplus funds for investment. The government says that could unlock a total of around £160bn to support employers and deliver for scheme members.

DB schemes do not feature as heavily in the conversation about impact investing as the DC schemes that have largely superseded them, as they are typically being de-risked ahead of sale to insurers and so tend to value greater liquidity. But Shekaran said changes to the surplus requirements could encourage greater investment in private markets, including impact funds.

Controversial measure

One of the biggest areas of contention during the legislation’s gestation was a government proposal to bring in a so-called reserve power of mandation, allowing the government to set some targets for DC schemes to invest in areas of infrastructure it regarded as important to the economy.

This power was seen as a way to stimulate more institutional investment into infrastructure in at a time when public finances are under pressure, with potential impact benefits if it generated more funding for social and environmental infrastructure.

However, political wrangling and industry concerns over how the mandation plan would work in practice resulted in a dilution of the proposals in the final legislation.

One major concern was how mandation could be squared with a pension fund’s fiduciary duty to its savers, given a government’s short-term interests were not always aligned with members’ long-term interests. Another worry was how institutions could sensibly implement a strategy that could be overturned if a new government with different political priorities was elected.

The final legislation was revised to assuage those concerns by, for example, only allowing the reserve power to be used only once, and not before 1 January 2028. The statute will also lapse if not used by 2032.

Shekaran said Investors for Purpose supported the protections put in place around mandation, noting that there were other ways to improve cooperation between pension schemes and funds, private sector actors and the government.

“We’re already seeing great examples of what are essentially blended finance structures, where public finance is helping to de-risk investments to make them more financially attractive to private investors,” she said.

Institutions such as the British Business Bank and the UK’s National Wealth Fund now provided the infrastructure to make such vehicles easier to develop, she added.

How the new legislation will affect impact investing – and the pensions industry more widely – will not become clear for some time, as the reorganisation associated with it takes place.

That is already clear from the revamp of Local Government Pension Schemes into larger investment pools.

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