UK pension funds are “not taking anywhere near enough risk” and need to invest billions of pounds annually to help reach net zero carbon emissions by 2050, according to a senior executive at the National Wealth Fund
Ian Brown, NWF head of banking and investments, told the Financial Times that funds needed to invest in the construction of infrastructure projects involved in the energy transition, rather than simply backing them once operational.
“Pension funds are prepared to invest in very large so-called transition funds. but often they are investing in operational wind or solar projects . . . What we need to do is actually build this stuff,” Brown said in an interview.
“People aren’t taking anywhere near enough risk . . . we need something like £30bn, £40bn or £50bn per year to be spent on the various technologies that we are trying to grow,” Brown said. But funds “want to take less risk and go with the safer assets which are the ones already producing cash flow”.
His calls for greater investment in green projects come as the government has made consolidating £1.3tn of UK pension assets a cornerstone of its plans to boost the economy, which unexpectedly contracted in January.
In November, chancellor Rachel Reeves set out proposals to merge defined contribution and local authority pension funds into a series of “megafunds”, saying the move could unlock up to £80bn of investment. Details of the plans are due this spring.
Pension funds have historically invested in already built infrastructure assets because they are keen to avoid construction risk and they require a guaranteed income stream to pay the retirement plans of their members.
Chris Hayes, economics director at the Common Wealth think-tank, said about 80 per cent of UK pension assets were in DB schemes, most of which have been closed to new entrants and so are limited in their liquidity.
“It is no surprise that pension funds lack the appetite for risky assets,” he said. “Their responsibility to their retirees is no less sacrosanct than for any other type of investor, and they should not be held responsible for the UK’s chronic lack of public investment in essential infrastructure.”
The UK’s climate change committee, which advises the government, estimates that Britain needs to invest roughly £26bn a year on average into low-carbon technologies and infrastructure until 2050 if it is to meet its legally binding net zero target.
Before the election, Labour watered down plans to spend £28bn a year on a “green prosperity plan”. Since winning power, it has rebranded the UK Infrastructure Bank as the NWF and increased its budget from £22bn to £28bn.
About £5bn has so far been deployed, most of which was under the UKIB. In a critical report last year, the House of Commons public accounts committee accused the UKIB of “reinventing the wheel” by financing projects already backed by private capital or investing in third-party funds, rather than directly into infrastructure projects.
Since becoming the NWF, the body has also been given a broader remit to back the sectors included in the government’s industrial strategy, including defence, as heightened geopolitical uncertainty leads to a change in investment priorities.
Brown, in post since 2022, conceded that estimates varied but said the UK had to spend “tens of billions of pounds” more a year to meet its net zero goals.
Ministers’ proposals to ease planning backlogs and shake up how clean power projects link up to the National Grid would be “vital” to attracting more investment in infrastructure schemes, Brown said, because of the number of projects that hit severe delays or were cancelled.
Brown said there was a “huge range” of areas in need of money, including floating offshore wind, battery storage and carbon storage.
His comments come after pensions minister Torsten Bell last week called on fund managers to re-evaluate Britain’s £2.4tn retirement savings industry, both in terms of maximising returns and ensuring the country is investing and growing after a decade of lacklustre economic growth.
Additional reporting by Jim Pickard in London
