We know how austerity feels, says Andy Haldane in his piece in the FT
Rachel Reeves is stuck between two insufferable abstract nouns: profligacy and austerity. The chancellor stands accused by those to her right of overborrowing, imperilling the nation’s creditworthiness. She simultaneously stands accused by the left of underspending and imperilling the nation’s citizens. Such is a politician’s lot.
We have had to bear austerity, we did between 2009 and Truss and we saw what happens when you go for growth without listening to those around you telling you the facts of the economy. Rachel Reeves cannot bring on a Liz Truss or Kwasi Kwarteng disaster, she has to take a long-term view and I was pleased by the recent announcements that Britain would invest for many years hence. I don’t think we as a country want more Truss.
And here is where I , as a pension professional , see what the Government is doing as central not just to pensions (which has had enough of austerity – witness the stagnation of investment in bonds and gilts), but to the economy that pays the contributions for decades to come.
We are not renewing austerity , it doesn’t feel the same in pensions and it does not feel like it if you are an economist. As Andy Haldane confirms (he was the Economist for the Bank of England and might well be Governor one day).
Economists agreed. Mirroring the technical definition of recession, austerity is typically defined as any sustained contraction in government spending. During the austerity era of George Osborne’s chancellorship, real departmental spending fell by over 2 per cent per year. But this month’s Spending Review foresees spending increases of over 2 per cent per year across this parliament. Austerity, The Sequel this is not.
I know that many readers object to the Government inserting a backstop into its proposals for pensions in the Pension Schemes Bill. The backstop is a reminder of the Accord between pension schemes and the country to invest more in the nation’s infrastructure, smaller companies and in unlisted private businesses. More importantly, it commits pension companies who have signed up to it to a growth mentality. There are some who have not signed up to it, presumably seeing a “de-risking” policy as better, they include Lloyds Bank who trade in pensions as Scottish Widows.
This week, tomorrow infact, I will be interviewing a former fund manager and economist and pension minister – Ros Altmann. I’m pleased that we will be talking about serious matters around the investment of our DB and DC schemes .
I hope that we will be able to discuss the change in political situation. She was Pension Minister under Cameron and I think Theresa May, these were years of depressed gilt yields making pensions appear in deficit. As we tried to show with the FABI index, pensions weren’t in deficit under a best endeavour method of valuation and now mark to market valuations – led by gilt yields- is probably over-valuing pensions.
Nonetheless , the current improvement in pension valuations is giving the Government the opportunity to drive through an agenda of consolidation so that in years to come we have just large and healthy pension schemes investing for growth (I made that bit up – it is what I’d say if I was Torsten Bell).
Ros Altmann is a Tory, I am not, but I think we have the same view on the nation’s economy which is that it has underperformed and needs pension funds money to grow again. You can join us to take this matter by the horns on Tuesday morning at 10.30 am
While I welcomed the infrastructure opportunity it is the equity side of the equation that should be taken where there is scope to beat inflation over the long term.
However it seems that early investment is taking the bond side and the inflation risk.
Surely issue of debt instruments would be simple enough in a well established marketplace leaving the seed money provided by pensions carving out the long term equity positions.
Here are some of the reports that I read over the weekend which caused the concern
June 21, 2025, https://www.portfolio-institutional.co.uk/private-markets-hub/nest-invests-450m-in-infrastructure-debt-fund/
Nest makes first multi-million infrastructure investment with IFM Investors – Corporate Adviser, accessed on June 21, 2025, https://corporate-adviser.com/nest-makes-first-multi-million-infrastructure-investment-with-ifm-investors/
Nest commits £450m to UK and European infrastructure through IFM partnership, accessed on June 21, 2025, https://workplacejournal.co.uk/2025/05/nest-commits-450m-to-uk-and-european-infrastructure-through-ifm-partnership/
My ealier message seems to have evaporated. Apologies if this is a repeat.
My concern in infrastructure investing is that the funds may take the place of debt provider rather that the inflation beating equity side of an infrastructure deal.
https://www.portfolio-institutional.co.uk/private-markets-hub/nest-invests-450m-in-infrastructure-debt-fund/
Nest makes first multi-million infrastructure investment with IFM Investors – Corporate Adviser, https://corporate-adviser.com/nest-makes-first-multi-million-infrastructure-investment-with-ifm-investors/
Nest commits £450m to UK and European infrastructure through IFM partnership, https://workplacejournal.co.uk/2025/05/nest-commits-450m-to-uk-and-european-infrastructure-through-ifm-partnership/
Worth repeating, John.
This seems to highlight an essentially “risk averse”
or “risk off” attitude at NEST and others.
When we invested in infrastructure for the Stagecoach Group Pension Scheme in the 1990s we invested in the equity, alongside our private partners. Co-investment in those days tended to do better.
Derek
How would you price a unit of 250 in a collective which has an on target value of £175k which will rise with RPI for the next 9 years. No dividends all bullet ended with say 10% winding up and disributon costs. With RPI on the long term at 3.5% maturity net £215,000. How much of a haircut would be required to motivate a pension fund buyer? . Do you think a rerun of 5% plus RPI would tempt. Counterparties AA rated
We just used to make capital commitments to a small group of general partners and monitor their quarterly reports, using our cash flows as net IRRs not the gross IRRs the general partners tended to talk up.
But I put your proposed security into AI (which is not good at financial math in my experience – ask it to calculate money-weighted rates of return with some negative numbers, for instance!):
Key Pricing Considerations
1. Illiquidity and Duration Risk:
• With no dividends and a bullet maturity, pension funds would face reinvestment risk and capital lock-up for nearly a decade. This demands compensation via a higher yield or capital discount.
• NAV haircuts for illiquid assets like private equity or real estate typically range from 6% to 30%, with 12% as an aggregate average.
2. Inflation Sensitivity:
• While RPI linkage provides inflation protection, pension liabilities are increasingly CPI-linked. Mismatches between RPI and CPI (currently ~1% differential) create hedging inefficiencies.
• If RPI reform aligns it with CPIH (as proposed), the instrument’s value could depreciate.
3. Credit and Counterparty Risk:
• AA ratings denote “high credit quality” but still carry vulnerability to economic downturns.
• The 10% winding-up costs amplify loss severity if the counterparty defaults or the asset is liquidated early.
After all that, AI suggested I apply a 17% haircut, but I prefer to pass altogether, if that’s allowed.
Thank you for the thoughts.
My thinking at the time was that to 30 year maturity was to coincide with the income replenishment requirement.
Dividends would need reinvesting which increases costs so added into the IRR maturity instead.
In my discussions with other unity holders ( I have some of this in my pension) they thought the acceptable range of discount would be 20-25%
The security seems to be sensible as the building which cost 125 M GBP 21 years ago needs only to be worth 78M GBP in 9 years time to pay out fully as anticipated.
The RPI issue would only affect the last 4 years of the project as the proposed changes don’t come in until 2030 according to some. Most of the unit holders want to keep invested so I suppose deal size and DD would become a factor I could certainly come up with 10M GBP worth or as little as 1M GBP
Over 25 years ago I produced a seed fund which worked with the bond issue to produce the investment for which we received an RPI linked share in the residual value secured on property. If the plan failed at any point our seed calpital received a twice bond rate returned from inception. Many variations on this theme were done until SIPP providers became concerned with becoming large rather than useful. If I were in practice today I would work on a secondary market to answer the liquidity road block.