Pension funds are the largest investors in the UK’s social impact investment market, according to the latest annual market sizing report from Better Society Capital (BSC). The report reveals that the sector grew to £10bn (€11.9bn) last year, marking a 7% increase compared to 2022.

In 2023, investment by pension funds represented 21% of the country’s total social impact investment market, with most of their funds being directed towards social and affordable housing, according to BSC.

Endowments and charities were the second biggest social impact investors, with 14%, followed by asset and wealth managers with 13%. High-net-worth individuals and family offices provided 9%, followed by government bodies and local authorities and banks, both at 8%.

The vast majority of the money invested (96%) was allocated towards social and affordable housing, with the remainder going to impact venture (1%), and charity bonds (3%).

Affordable housing

According to Chris Moore, investing and accounting team lead at Wiltshire Pension Fund, and one of the report’s contributors, affordable housing provides them with “inflation-linked income with the potential for long-term capital appreciation – a perfect match for a long-term open pension scheme such as Wiltshire Pension Fund”.

Pension funds, including local government pension schemes (LGPS) such as Wiltshire, are the biggest investors in Britain’s social and affordable housing sector, representing around 40% of the market, BCS said.

The positive impacts delivered by investing in affordable housing “are completely integral to the investment case”, said Moore.  “Affordable housing provides very positive benefits to those on lower or median incomes, priced out of home ownership in the less secure private rental sector.”

Throughout the years, BCS has regularly co-invested alongside several pension funds, including Greater Manchester, Strathclyde, and London CIV, in good quality social and affordable housing.

Investing in social and affordable housing “offers pension schemes a chance to diversify their portfolios and secure stable, long-term returns”, Linda Carmody, senior relationships manager at BCS, wrote in a viewpoint article for Impact Investor in May.

Growing sector

The report notes that social impact investment market has grown twelve-fold since 2011. Although the UK economy has struggled in recent years, there was “stable investor support” for tackling social issues such as reducing child poverty, combatting homelessness and preventing long term health conditions.

“It is a source of encouragement that the UK social impact investment market grew once again last year,” said Stephen Muers, chief executive officer of BCS.

But he warned of “significant challenges ahead”, including in housing, social inequality and the disparity in health and wellbeing across the UK.

“As we look to the future, it is crucial for investors, businesses, and the government to work closely together to channel investment towards organisations that need it,” Muers said.

The report comes as the new UK government, led prime minister Keir Starmer, is preparing its first budget to be presented on 30 October. As part of its review of the UK pensions sector, the government is expected to examine the barriers to pension fund investments.

“With the Labour government’s focus on growth we have a unique opportunity to shape policies that encourage more capital into impactful projects that benefit society, ease the burden on the treasury and support the economy,” Muers said.

Read more @impact investor