Can pension schemes help drive economic growth in the UK?

That’s the question Rt Hon Rachel Reeves asked Nest pensions and other major UK pension schemes at a roundtable event on Monday 22 July, exploring whether the billions of pounds we’re responsible for could be directed more towards British assets.

Often the question about pension schemes investing in the UK has been simplified to focusing on the amount of money pension schemes have in listed companies, but does this help economic growth?

Purchasing listed shares on the secondary market provides no new money to the company. It simply transfers cash and ownership rights between two investors, bypassing the investee company completely.

What’s more impactful for economic growth is encouraging companies to get bigger, to increase investment in their business and to expand operations by taking on new staff.

Helping fledgling businesses to get off the ground is something the UK outperforms many other countries. In particular, our world class universities support the development of high-potential start-ups at the frontier of new technology.

The UK is the third biggest destination for early stage, Venture Capital (VC) funding and has the fourth largest number of ‘unicorns’ (start-up companies now worth more than a billion pounds) in the world.

And yet, the UK struggles to provide the necessary capital to these fledgling companies when it comes to scaling up their operations.

Since the Great Financial Crash of 2008, banks have wound down their lending to small and medium sized companies. While a start-up company can get enough money to get going, when it comes to expansion many are looking abroad to get the investment they need, whether that be from big US funds, management being bought-out by international equity investors, or being targets for M&A by foreign corporate buyers.

These different routes all lead to a similar outcome - a greater share of operations and profits going abroad.

Whilst the availability and cost of capital is one of many factors affecting company decision making, it’s an important one. The Bank of England survey of productive finance found that the availability of finance was either a major or moderate obstacle to investment for around half of UK companies. The number of small businesses citing a lack of capital was twice as high as the share of large businesses.

Pension schemes should be seeing this great opportunity to invest in UK businesses and be filling this gap in the market. Giving exciting British companies the financial support they need before they look abroad.

The research we’ve undertaken at Nest pensions reinforces this. It’s clear UK capital markets are not suitably supporting some British businesses, and we want to do something about it.

Nest pensions has already set up partnerships to invest in growing, unlisted UK companies and we already have ￡130 million invested through private equity deals. This is just the start and we expect to be providing billions of pounds over the coming decade to UK companies wanting to grow.

And why wouldn’t we? Nest pensions members represent a third of the UK workforce. What’s good for the UK economy, is good for our members. If we find two exciting young companies, one here in the UK and another based elsewhere, why wouldn’t we choose the UK company, all things being equal?

We can also have a greater impact on their lives. An example of an unlisted company in our portfolio is Deep Green , a technology-driven business using the heat from data servers to help make UK swimming pools more commercially viable.

Its business is built around saving pools ￡80,000 a year by reducing heating costs, a significant reduction in overheads and something which can help stop the trend of pools closing across the UK. The servers placed on site also benefit from free cooling, allowing it to offer environmentally friendly and cost-effective data processing services.

The tens of millions of pounds we’re expecting to invest in Deep Green over the coming years, through our mandate with Octopus Energy , will allow the company to expand across the UK, helping thousands of community swimming pools to stay open.

Not only are we giving Nest pensions members access to an exciting new investment opportunity to grow their pension - achieved without having to pay fund managers’ performance fees, I’d like to add - we’re also improving their family’s access to local swimming pools. It’s a win-win for all involved.

Defined benefit schemes may currently hold most of the UK pension wealth, but defined contribution schemes are the ones growing rapidly. Nest pensions takes around ￡6 billion a year in contributions and will be managing more than ￡100 billion by the end of the decade.

How we invest this money matters and can play a crucial role in improving our members’ retirement outcomes and helping drive UK economic growth. We already see fantastic opportunities to put this money to work, and we'll only be increasing our investment in the UK.