What are superfunds? Investing Explained

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s superfunds.

A man with a plan: Tony Blair

What are these?

Superfunds are the focus of the latest big idea to revitalise the economy. The proposal comes from the Tony Blair Institute for Global Change, the think-tank set up by the former prime minister.

Under a plan unveiled this week, thousands of UK retirement funds would merge into about six ‘global scale’ superfunds, each valued at about £300billion to £400billion.

These would invest in British business and infrastructure.

Why do we need such funds?

The aim is ‘to benefit pensioners and light a fire under the UK economy’, the institute argues. UK pension funds no longer have substantial holdings in British companies, which has cut off the supply of the capital vitally needed to finance innovation and improve the nation’s productivity.

It’s also been to the detriment of share prices of UK companies, which is why an increasing number are seeking to quit London to list on Wall Street instead.

Which pension schemes would be involved?

About 4,500 of the smallest defined benefit company pension schemes (where the benefits are guaranteed) would be given the chance to merge with the Pension Protection Fund (PPF) to create a GB Savings One fund.

This model would be rolled out, taking in the remaining defined benefit schemes, defined contribution (DC) schemes (where payouts depend on investment performance), local government schemes and public sector schemes,which are mostly not funded.

Also included would be Nest, the National Employment Savings Trust, which covers workers in auto-enrolment schemes.

Currently, the PPF operates a lifeboat for schemes whose sponsoring companies have gone bust. The body’s role would obviously be hugely expanded.

Are current politicians in favour?

The proposals reflect the growing enthusiasm for superfunds in Whitehall and Westminster. The Productive Finance Working Group, whose members include the Bank of England, the Treasury, the Financial Conduct Authority and some large fund management groups, has been looking into the issue since 2020.

Chancellor Jeremy Hunt is very keen to find a way to unlock private pension capital to reinvigorate the economy. Labour’s Rachel Reeves, the Shadow Chancellor, supports the creation of a £50billion Future Growth fund into which every DC scheme would be compelled to divert 5 per cent of its assets.

Should we be excited or extremely apprehensive?

You need not fear an immediate raid on your savings – superfunds are some way from becoming a reality. Opinions are divided on the plan, and not just because some people are instinctively distrustful of any policy put forward by Blair.

Some critics point to the damage inflicted on pension schemes by his government’s dividend tax credit changes.

What are the principal objections?

Questions abound. Can pension scheme members have confidence in the Government’s ability to direct the investment of cash to stimulate the economy and provide the highest possible long-term rewards?

Would scheme members be entitled to a say over how their savings are used?

What level of recompense will fund managers expect for their role? Will there be payment for failure, or only success?

This post first appeared on Dailymail.co.uk