October 1, 2024
In his most recent article for Pensions & Investments, Charles Allen, Head of European Real Estate, speaks about the risk exposure and possible distortion to the real estate market, if governments start to interfere with pension fund investment strategies.
Pension funds are among the most influential capital providers globally, so it’s no surprise governments with lacklustre GDP growth are desperate to unlock them.
As part of a broader supply-side reform strategy, pension funds’ patience, taken together with their favourable allocations mix (notably overweight fixed income and liability-hedging assets),opens a wealth of possibilities to invest — directly and indirectly — in expenditure-heavy development projects across a spread of asset categories. Across most advanced economies, policymakers have cottoned to the potential residing in pension pots and are exerting their influence.
In the U.K., new Chancellor Rachel Reeves is mulling over the creation of a mega fund model similar to what’s seen in Australia and Canada, in an attempt to unlock the collective £360bn ($481.4 billion) Local Government Pension Scheme war chest for domestic investment. Pension funds will also be forced to disclose how much they invest in home soil assets by 2027, with “buy British” being back in vogue.
Similarly, in Canada and the U.S., CEO and business leaders have joined forces with state governments to press for greater domestic allocations. Former Bank of Canada Governor Stephen Poloz’s exploration of how this could be structured is the latest case in point.
Channelling public capital to invest domestically might seem like an ingenious form of monetary policy to stimulate supply-side growth.
Governments hamstrung by high debt burdens, fiscal tightening and central bank interventions to stave off stagflation, are having to get inventive. Sourcing capital through bond markets means having to service it at higher rates of interest.
Redirecting investment flows, however, has the privilege of being free. There are few who doubt that pension funds should be influential in their domestic economies. They are a part of the institutional arsenal that will power the economy of tomorrow through better infrastructure — and more of it.
But governments should think twice before trifling with their investment strategies. Interference could damage the integrity of savings among contributors, allocators and the “invisible hand” of the financial system at-large.
It is incumbent upon pension funds to prioritise performance over political leanings. This is necessity over choice; it’s about where the opportunity for superior returns can be seized. Allocation strategies are therefore guided by a common investment thesis: low-risk investments with hedging characteristics in highly defensive asset categories with long-term income potential. Not borders.
This principle does not necessarily equate to domestic outflows. The U.K. and Europe have been benefactors of huge inflows from the likes of Australia, Canada and Asia, where Singaporean conviction is shared by Japanese and Korean pension funds of late. There, governments have been contrarian in their push for boosting international allocations. This investment wouldn’t materialise if institutional providers of capital were constrained in the how and where they invest.
Governments would do better to endorse and enable than to instruct. Capital is highly mobile and finds a home in more welcoming geographies where capital is more easily matched with compatible opportunities. Creating regulatory efficiencies in areas of the economy like procurement, planning and capital structuring, is an indirect way of influencing positive inward investment.
Pension funds don’t need the nudge. There are already opportunities to invest in returns-based assets domestically while carrying low risk. Private equity, hedge funds and more recently, real assets, are now central fixtures in portfolios precisely because they meet this threshold of investability, not because they are asset classes that have been mandated.
Governments competing over globally mobile capital need to consider how they make it as easy as possible to promote and speed up development, to shorten the time it takes to operationalise a stable asset. They must also consider how to streamline the process of ratifying a public-private partnership, especially when some governments are more willing to treat quickly.
In the battle for capital it will be policymakers who create a microeconomic environment conducive to reliable, consistent investment that will win out. Governments that tamper with the investment thesis of pension funds — already the bearers of much of the frustrations that exist around low growth — and dictate terms, can expect the consequence loss of confidence in free market decision-making to affect investors at all tiers.