The government is currently somewhat bound by measures it can take to boost economic growth.
The predicament of public finances – the government borrowed £25bn in April alone – means that neither meaningful tax cuts nor increases in government spending that boost productivity are currently feasible.
So it’s no surprise that ministers, as they look for other levers to pull, have turned to the country’s retirement savings.
An estimated £1.4 trillion is in private sector “defined benefit” (sometimes referred to as final pay) pension schemes, while an additional £1.1 trillion is estimated to be spent on “defined contribution” schemes (sometimes referred to as money purchase schemes) .
That’s an awful lot of money.
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However, most of it is invested in places other than the UK stock market – one of the main ways money is channeled to companies that need it to support their expansion plans.
At the turn of the century, UK equities accounted for about half of the money tied up in UK pension funds, but now they represent less than 10% of fund assets.
Allowing pension funds to invest more in the UK
Ministers would like to see more of this invested in the UK.
Some of that would be in British listed companies, but the government would also like to see it invested in infrastructure projects.
The reasoning is that since infrastructure assets take many years to build and generate a stream of income, pension funds are the natural and obvious investors in some projects because they can afford to have a long-term view.
This is already happening to some extent. Insurers such as Legal & General and M&G have been investing more in infrastructure for some time now, but also in related activities, such as building rental homes.
But the government clearly believes that more needs to be done.
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The retirement age has been abolished in the 2023 Budget.
The approach of British pension funds is seen as too risk averse and cautious
To that end, ministers are reportedly looking at the Pension Protection Fund (PPF), the lifeboat scheme that protects people on benefit pensions when an employer becomes insolvent.
The Financial Times (FT) reported on Friday that proposals under consideration by the Treasury would broaden the PPF’s mandate so that it takes a more active role in entering into company pension schemes that have not failed.
The Treasury does not seem to be alone in thinking in this direction.
The Daily Telegraph reports today that next week the Tony Blair Institute will recommend that sponsors of the smallest 4,500 defined benefit plans should be given the option to switch to the PPF.
The idea behind this – expanding the PPF’s reach to the pension scheme of both living and dead companies – is that the fund, which is a public company and reports to Secretary of Work and Pensions Mel Stride, could then raise more money. spend on start-ups and high-growth companies.
It speaks to the fact that ministers believe that UK pension fund managers are too risk averse and too cautious when investing people’s pension money.
Ministers believe that this approach will slow down the economy.
As Andrew Griffith, the city’s minister, told the Telegraph today, “We are working to remove points of friction, streamline our regulations and encourage a greater culture of risk-taking.”
A potential benefit for savers
Mr Griffith said this would also benefit pension savers over time.
He continued: “[We have to] shift the emphasis from funds that run themselves for minimal cost to funds that look closely at performance and that’s what this is all about, because it’s about making sure long-term savers get as prosperous a retirement as they can.”
Strengthening the PPF’s job is one of the few ideas being kicked.
A Canadian style idea
Another that has sparked interest is the Canadian-style “collective defined contribution” plans.
These plans, which have also been widely adopted in Denmark, the Netherlands and Australia, aim to provide a middle ground between the more generous defined benefit plans and the less generous defined contribution plans in which employers and employees pool retirement savings in a fund that aims to provide members with an income upon retirement.
Unlike a defined benefit plan, that income is not guaranteed, but unlike a defined contribution plan, it would also try to protect participants from the vagaries of market performance and the risk that an employee would see the value of his savings collapse shortly before he retires. collapsed. they would access it after retirement.
These schemes have been touted as spreading risk between generations and Royal Mail has set one up for its employees.
Not everyone is convinced
However, not everyone is thrilled with this idea.
John Ralfe, the independent pension adviser, has pointed out that pooling retirement savings in itself does not lead to higher investment returns for retirees – it still all depends on how successfully or otherwise that money is invested.
Another idea that is being talked about a lot is the idea of sending pension schemes to put 5% of their assets into a £50bn growth fund, which could invest in the fast-growing technology sector in the UK, for example.
It was floated as an idea earlier this year by Nicholas Lyons, the Mayor of London, who is currently seconded by the life and pension company Phoenix Group.
Mr Lyons’ idea has not received universal support – Amanda Blanc, the CEO of insurer Aviva, said this week that she didn’t think coercion was a good idea.
The Pensions and Lifetime Savings Association, the trade association for those involved in workplace pensions, also dislikes the idea of coercion.
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But someone who thinks it’s worth looking into is Rachel Reeves, the shadow chancellor, who told the Financial Times (FT) this week that she supported the idea.
Ms Reeves said coercion may not be necessary given the industry’s good will to invest more in the UK, but added “nothing is off the table”.
She told the FT in the same interview that she was also in favor of consolidating smaller pension plans to build scale more easily.
So the direction of travel is clear. It feels like there will be more government interference in how occupational pension plans are run and how they invest, regardless of who wins the next election.
