Politicians desperate to kickstart economic growth are pondering how to co-opt the nation’s pension savings to boost investment in UK plc.
Both the Tories and Labour are looking at ways to channel the trillions of pounds stashed in retirement funds into ‘productive’ and – this is key – homegrown investments.
There is apparently a cross-party consensus that the Government is strapped for cash, higher interest rates make it too expensive to borrow much more, and pension funds are sitting on vast sums that could be deployed more usefully at home not abroad.
Will a Tory or Labour government force pension schemes to invest savers’ money in the cause of UK growth?
That might be in long-term, illiquid infrastructure projects like roads, rail and utilities, or innovative new businesses that require ‘patient’ capital.
But it all boils down to politicians wanting pension funds to back higher risk domestic investments to increase growth, create jobs, boost government revenues, and generate money to pay for their own priorities – whether that’s spending on public services, transitioning to a green economy, or cutting taxes.
But hang on, back up a bit. Isn’t that your retirement savings that they are talking about?
The big pension players might be holding the cash, and their investment managers delegated to make decisions about it on your behalf, but this is ultimately the money you are putting aside to fund your old age.
Maybe increasing UK GDP is a great patriotic endeavour you support. But perhaps you want your hard-earned pension pot invested for the best returns – whether that might be in the US tech giants, Japanese robotics firms, or the most promising emerging markets – not used to make risky bets on homegrown ventures, with the ultimate goal of filling state coffers.
Pension industry experts are very much alive to the controversy of the Government interfering for its own ends in how people’s pensions are invested.
The purpose of private pensions is not to act as a Government piggy bank to help finance the domestic economy
‘It’s not their money. It’s never been their money,’ says Patrick Bloomfield, partner at pensions consultant Hymans Robertson.
However, he also points out that the Government does heavily subsidise pensions, noting: ‘We, as a society, have decided the beneficial tax treatment of saving for later life is a good idea.’
Bloomfield adds that democratically elected politicians do have the power to pass legislation and get their way on this issue, perhaps via the creation of a sovereign wealth fund.
Therefore, should both major political parties include plans to use pension funds to pursue economic growth in their manifestos at the next election, something along these lines is likely to make it into law.
Jason Hollands, managing director of DIY investing platform Bestinvest, says: ‘It is understandable that policymakers are looking for a magic bullet to help boost the domestic economy, especially one that doesn’t rely on the public purse, funded by either more taxes or further borrowing.
But he adds: ‘It’s also important to remind ourselves that the purpose of private pensions is not to act as a Government piggy bank to help finance the domestic economy.
‘They exist to secure a decent retirement for their members and should therefore not be strong-armed into having to allocate into higher risk investments.’
We look at what is known about the Government’s and Labour’s intentions so far, whether pension schemes can really be forced to invest savers’ money in the cause of UK growth, and what is most likely to happen from here.
What plans do politicians have for pension funds?
Chancellor Jeremy Hunt is expected to lay out his plans at the annual Mansion House dinner later this month.
But he has already floated the idea of pension funds investing more adventurously in young and start-up UK companies, and in infrastructure which generally involves tying up money in more long-term and illiquid projects.
Hunt is also apparently interested in a plan pushed by the Tony Blair Institute to consolidate some defined benefit pensions into a superfund, perhaps run by the Pension Protection Fund which is a lifeboat scheme funded via an industry levy.
The PPF takes over defined pension schemes when employers go bust, has a successful investment record, and runs a surplus.
The Tony Blair Institute proposal is that a future PPF superfund would benefit from the power that comes with scale, but be run separately from the existing protection fund.
Jason Hollands of Bestinvest says pension schemes and managers have most certainly relayed to the Chancellor that investment allocations should not be forcibly mandated, and he understands this is not being considered.
‘The measures to be announced are therefore likely to focus on incentives and the removal of regulatory barriers. In other words, expect carrots to be on the menu at the Mansion House dinner, rather than Mr Hunt wielding a big stick.’
Meanwhile, Labour Shadow Chancellor Rachel Reeves has talked up the idea of a £50billion fund to bankroll early-stage UK growth companies.
She reckons pension funds can be persuaded to put 5 per cent of their assets into it, though she hasn’t ruled out making this mandatory.
What could happen to pension savers’ money?
The two parties might take different approaches, but both are eyeing up people’s pension savings as a vast pot of money that could help fund their own economic agendas.
In reality, pension funds are structured in different ways and run on different rules, which could limit what either a Tory or a Labour government is able to force them to do – see right.
Defined contribution pensions: Savers have control over how their money is invested. However, inertia means the majority of workers leave their savings in their employer’s default funds, which are often invested globally.
People with DC pots could be incentivised to invest for UK growth, but it would be difficult to make them because ultimately they could simply stop contributing, according to Patrick Bloomfield of Hymans Robertson.
‘It would fall on its face,’ he says. ‘It doesn’t make sense to force it. We would do other things with our money.’
But he adds: ‘You could make the investment case more favourable with a partial subsidy as seed money.’
Defined benefit pensions: The overwhelming majority in the private sector are closed to new business, and taking less investment risk because as members die they will eventually be wound up.
Many of the more successful schemes that can afford it have transferred their responsibilities to insurers.
Bloomfield says in this case again the Government would have to come up with some incentive to get schemes to take more investment risk.
You could make the investment case more favourable with a partial subsidy as seed money
This would have to be sufficiently attractive that some large schemes might perhaps reopen to new members and want to take more risk, he explains.
Pension Protection Fund: This could be used to run a superfund that consolidates defined benefit schemes that are still solvent, not just ones where the employer has collapsed.
Its chief executive, Oliver Morley, says: ‘The PPF’s future role is a matter for policy makers, but we recognise there are opportunities which could deliver better outcomes for defined benefit scheme members and support the wider economy.
‘Given our proven skills and capabilities, including our investment expertise, we stand ready to support government and industry where PPF could form part of the solution.
‘We would also want to reassure our current members, and levy payers, that delivering the best outcomes for them remains our priority.’
Public sector defined benefit pensions: Some public sector pensions like those serving the police, fire service, teachers and MPs are funded by taxpayers, so are not sitting on any cash that could be invested, says Bloomfield.
But he points out: ‘Local government pension schemes are funded and have a lot of assets. The Government might push them on how they invest.’
The Tories and Labour are looking at ways to channel the trillions of pounds stashed in retirement funds into ‘productive’ and – this is key – homegrown investments
What does the pension industry say?
‘The litmus test for any new policies must be that they deliver better outcomes for savers, as pension money is intended to secure their standard of living in retirement,’ says the Association of British Insurers, which has just issued a detailed report in answer to ideas floated by politicians so far.
‘Pension schemes investing in savers’ interests is entirely compatible with investing in the UK economy, but the former must take precedence,’ it says.
‘If the Government wants to boost further UK investment, and people’s savings, it should focus on making the UK a more attractive market and create incentives for pension schemes.
‘The UK is competing for capital on a global stage, and recent foreign Government interventions such as the US Inflation Reduction Act, and the EU’s Green Plan are aimed at increasing such investment.
‘The UK must have an attractive offering too. This will then naturally attract greater capital from pension funds.’
But the ABI warns: ‘Governments should not mandate that pension money is channelled into particular sectors of the economy. This avoids both the real risk of asset bubbles, and shifting priorities from one administration to the next which sits uncomfortably with long-term investment.
‘Trustees must remain sovereign in their decision making and continue to make investment decisions themselves, with appropriate investment advice.’
And it stresses the need for a long-term consensus between the political parties, saying: ‘The purpose of pension investment is securing savers’ standard of living in retirement. Pension investments endure for decades, far beyond the duration of governments.
‘That is why it is vital that any changes are part of a long-term strategy for pensions which should be developed on a cross-party basis.’
The Pensions and Lifetime Savings Association says: ‘Pension funds are already large-scale owners of UK assets.
‘Their needs are often based on whether they are defined benefit or defined contribution schemes, whether they are open or closed to new members, and their scale.
‘While it is essential their investments meet the needs of savers and scheme members in line with the fiduciary duty on pension schemes to act in the interests of their members, this does not mean that they are not also able to be a source of capital for owning the right sort of UK investment assets, where they have the right risk-return characteristics.’
It identifies a dozen ways UK assets could be made more appealing to pension funds, including creating a pipeline of investment opportunities that are packaged to be suitable to their needs.
The PLSA adds: ‘Pension funds are open to increasing investment in UK growth provided it is in the interests of the savers whose money we manage.’
Becky O’Connor, director of public affairs at financial services firm PensionBee, says: ‘It is not the job of pension savers to bankroll the Government’s pet projects. It is the job of the industry to preserve and grow the money we carefully set aside for our own futures.
‘While there may be a Venn diagram in which these two objectives overlap and this area is worth exploring, there is also the risk that people’s retirement money is squandered.
‘This could be through inefficient management of projects that turn out to be less profitable than first thought, with gains ending up in the pockets of consultants rather than in savers’ bank accounts in later life.’
She says: ‘Done wrong, there is a risk that this strategy could result in poorer returns for millions of savers. This risk would have to be managed very carefully, with full transparency over what our pension money is being used for, and at what price.’
Done wrong, there is a risk that this strategy could result in poorer returns for millions of savers
But O’Connor adds: ‘You have to ask; if the risk/return trade off is not currently appropriate for UK pension savers, what is the Government going to offer to make it so?’
She supports the gist of the ABI’s recommendations, which are focused on better outcomes for savers and ‘incentives to invest, rather than instructions’.
Jason Hollands of Bestinvest says: ‘It is certainly true that defined benefit pension schemes, those which provide members with a retirement income linked to their final salary, have become very conservative in approach.
‘Outside of the public sector, these schemes are mostly closed to new members and are focused on matching assets to liabilities, with risk minimisation a much higher priority than maximising returns.
‘Schemes are typically heavily invested in bonds, with much lower equity allocations than when they were open to new members in the past and there has also been a sharp reduction in their exposure to UK equities within this. ‘
He says encouraging pension schemes to take more risk and invest more heavily in UK stocks is being seen as a potential solution to the UK’s shrinking equity market.
Hollands adds that this policy, and other reforms around listing rules and governance, is aimed at stemming the tide of innovative UK companies listing in the US or getting snapped up by overseas buyers, instead of scaling-up to become FTSE 100 constituents of the future.
