Pension funds urge UK government to change borrowing rules to boost green spending
With only weeks remaining until the UK’s Labour government announces its first budget, a coalition of Australian and UK investors, alongside the Pensions and Lifetime Savings Association (PLSA), have united to lobby the new administration on strategies to boost green investment.
IFM Investors, a pension fund-owned asset manager, spearheaded the creation of a blueprint document outlining key reforms to attract greater institutional capital. Launched in Westminster today, the initiative received backing from some of the UK’s largest pension funds, including USS, Nest, Border to Coast, LGPS Central, and the North East Scotland Pension Fund. Support also came from major Australian super funds such as HESTA, Aware Super, and CBUS.
The new UK Government has made achieving clean power by 2030 one of its core priorities, aiming to collaborate with private sector investors to double onshore wind, triple solar power, and quadruple offshore wind within the next six years. However, it faces significant fiscal challenges.
UK Chancellor Rachel Reeves recently made headlines by warning of a £22bn black hole in public finances. Current fiscal rules stipulate that the debt-to-GDP ratio must be falling within a five-year period and that the annual budget deficit to GDP ratio should be below 3% by the end of the same time frame.
These rules, in place since the 1990s, are now being questioned by some economists who argue for a review. The blueprint presented today proposes reforming Public Sector Net Debt (PSND) by including the net worth of illiquid infrastructure investments.
This comes amidst growing debate about the role of the UK’s fiscal rules in supporting capital investment and the development of the government’s flagship finance institutions, Great British Energy (GBE) and the National Wealth Fund (NWF).
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In addition, the blueprint outlines other policy reforms, such as overhauling the UK’s planning system and extending the duration of Contracts for Difference (CfDs) to lower the cost of capital for renewable energy projects.
However, the proposal dominating headlines was the suggested reform of the UK’s government debt rules. Reeves is keen to avoid any perception of fiscal recklessness, mindful of the impact of her Conservative predecessor’s 2021 budget, which triggered a crisis in UK government bond markets.
Gregg McClymont, executive director of IFM Investors, explained the rationale behind the reforms: “Mobilising pension fund investment has the potential to create benefits for society, but quite rightly, pension funds have a fiduciary duty and must only invest in their members’ best interests.”
“There are a number of steps to unlocking this investment. But a prerequisite is that the government should account for infrastructure assets more like a long-term investor, and less like a commercial bank holding equity as loan collateral to be sold in a fire sale,” McClymont added.
Speaking on the Today Programme, Paul Johnson, director of the Institute for Fiscal Studies, expressed caution about the feasibility of such a reform: “Measuring the value of investments is, first of all, extremely hard, secondly, very uncertain, and thirdly, even if you can do that, it doesn’t tell you very much about how much the government can borrow. Borrowing costs are set by markets. I suspect we may see some sort of halfway house, valuing financial assets like the student loan book or the assets of the Local Government Pension Scheme.”
At the Westminster roundtable, pension fund representatives reiterated their commitment to investing in the UK’s energy transition. Carol Young, CEO of USS and National Wealth Fund taskforce member, expressed support for the initiative, stating: “Used well, the policy options offer the opportunity of better aligning pension scheme interests and capital with the government’s net zero ambitions.”
Last year, IFM Investors signed a Memorandum of Understanding with the UK government to invest £10 billion into infrastructure projects by 2027.
