National Wealth Fund reform could drive up investment in the UK’s just transition

Rachel Reeves says that the UK must “invest, invest, invest” to deliver sustainable growth. She’s right - but we have a very steep hill to climb. Under-investment is a long-standing UK problem: we’ve been at the bottom, or near the bottom, of the G7’s investment league for the past fifteen years. Recent research from the CBI showed that the net-zero economy is a major growth opportunity, but we stand to miss out without a major scale-up of investment, particularly in the next five years. The Climate Change Committee estimates the additional investment needs of a ‘balanced pathway’ to net zero are £26bn per year, but these will be front-loaded with a peak of £46bn in 2029.

The government is betting on the biggest review of the pensions system in 20 years to help deliver a significant part of that scale up. With the UK pensions industry holding over £2.5 trillion in assets, and with less than a fifth of that invested in UK productive assets, there is no doubt room for a major step change.

There are two big levers that the government can pull. First, pension scheme models such as Collective Defined Contribution schemes encourage a longer-term investment perspective – the government should promote these. Second, dealing with the crisis of under-saving by millions of people, particularly those on low incomes, by gradually increasing mandatory pension contribution rates from 8% to 12% over time would deliver an extra £10bn per year in savings. This could be directed to the UK’s investment needs and to accelerating the transition to net zero, if the government can work out how to get the pensions industry to make a major shift in its investment patterns. Only 4% of total pension fund investment is currently directed to climate solutions, and a major barrier to scaling up this investment is the need for suitable assets to invest in.

The National Wealth Fund should be the logical way of providing pension funds and other investors with the opportunity to pump money into the UK just transition, but it will need a significant makeover if it is to succeed. The Fund has a starting capital of £27.8bn, but the UK Infrastructure Bank, on which the Fund is built, has so far only managed to use a maximum of £1.7bn of that in any single year. The government aims to double that and mobilise £3 of private investment for each pound it puts in. In other words, the government’s ambition is for the Fund to invest around £3.5bn per year and mobilise around £10bn more. That is a long way from what could be achieved. The German equivalent of the Fund, KfW, did £68bn of business in 2023. Key to growth will be allowing the Fund to issue its own bonds, which could increase its firepower by over ten times. This could create as much as £100bn in new green bonds that pension funds could buy, as well as providing them with a pipeline of projects to co-invest in.

This scale up of the Fund will take time, and will need to be accompanied by reforms to make sure the fund is focussed, independent and ambitious. The government has made positive steps to keep the Fund focussed: it recently reaffirmed the Fund’s two strategic objectives as climate change and regional development, a welcome continuity from the UK Infrastructure Bank which the Fund replaced. True independence of the Fund is still a work in progress: it must avoid the trap of being too close to the financial sector. This risks the Fund taking on the risk while private investors capture the reward, or subsidising private sector investments that would have happened anyway. Putting public interest representatives on the board would be a good way to ensure the Fund delivers for the UK. Focusing the Fund on outcomes – the green investment scale-up the country needs – and not limiting the methods it can use to achieve is key to making sure the Fund has the right level of ambition. This means not just doing investments that the private sector is unwilling to do alone, such as in developing technologies or underserved regions, but also catalysing the widespread scale up of investment to meet key goals, such as delivering clean energy by 2030.

Now more than ever, the UK needs an ambitious plan to scale up investment in the just green transition: pensions reform allied to a scaled up, effective National Wealth Fund are major tools to do the job.

More on this:

Canadian pension giant and National Wealth Fund support UK battery storage project