Time to invest today's pensions in tomorrow's infrastructure

Pensions are an integral part of the broader economy. This is true, both when saving a pension pot or when using that income in retirement.

Old-style company defined benefit pension schemes are in decline as companies become less paternalistic and less willing to take on longevity risk. Meanwhile defined contribution savings are growing, helped by auto-enrolment.

Overall, it is debatable whether pension savings are large enough to satisfy people’s expectations for retirement. Many company schemes are in deficit relative to their obligations, and many individuals aren’t saving enough. A huge sum of money has to be invested in order to generate safe returns for a population that is likely to live longer than any of its predecessors. The world is awash with liquidity. In an ultra-low interest rate environment, quantitative easing created more fast money—£375bn in the UK alone— which has pushed up asset prices (equities, bonds and property) as it chased yield.

Pension funds tend to consist of slow money, patient capital that can be invested for the longer term. This is particularly the case where the amount of money that will need to be paid out to pensioners in retirement is a known quantity or a fixed cash flow, for example where the fund has been crystallised and turned into a known future income, through the purchase of an annuity. This can happen at either an individual or a corporate level.

Slow Money—with investment horizons out to fifty years—is ideal for infrastructure investment. This is important for two reasons. First, it fills a gap left by retrenching banks which are shrinking their balance sheets; and secondly, because investment in infrastructure (including housing) will be crucial for long-term, sustainable economic growth for the UK. For example, our £38bn annuity fund includes 50-year investments in student accommodation, energy and social housing.

Long-term investing such as this can help address the biggest issues that our pension system faces. One is the financial shortfall many will face in retirement due to under-saving. I have argued before in Prospect that the typical pensioner’s personal balance sheet often contains a large component of mortgage-free housing. Many think of the home as part of their pension—few treat it as such by turning property into income.

However, surveys tell us that almost a third (4.5m) of pensioners want to move house, but that the right housing just is not available. The rural cottage is not necessarily the dream any more. Many want to live in urban settings, close to family, friends and facilities, within walking distance of the doctor’s surgery, and where the supermarkets deliver.

We need to build many more homes that work for these last time buyers. A significant portion of the 200,000 new homes we need to build annually should be for last time buyers—to buy to rent and across all forms of tenure. The investment to build these homes can be provided by the slow money: Legal & General has a pipeline of 25,000 new homes which we are funding, including affordable housing and specialist key worker housing, as well as over £1bn of specialist student accommodation. Policy could help: downsizing should be encouraged by a Stamp Duty break for pensioners who are trading down.

If retirees choose to move, they will be freeing up housing stock for growing families. This helps address the second big problem with pensions and an ageing population, which is intergenerational fairness. As populations age, pensions and healthcare for older people become a bigger cost for younger people.

So as well as helping free trapped savings in housing, we need to invest today’s pensions in tomorrow’s infrastructure so as to deliver growth for the next generation: in transport, energy and digital, as well as physical, infrastructure.

John Godfrey, Corporate Affairs Director, Legal and General