A new plan for pensions that could actually help

The government wants to use the nation’s private sector pension pots, which hold trillions of pounds worth of employees’ savings, to fuel its growth plans. It has asked pension providers to sink at least 5 per cent of the money they manage into assets that include government-led projects such as roads, hospitals and digital infrastructure.

Fund managers, brokers and think tanks argue that if pension funds must toe a certain line, it should be to specifically support the UK’s cash-starved entrepreneurs, and listed companies that have suffered the effect of the global stampede into US shares. A recent paper from think-tank New Financial warns that this situation will worsen without new incentives for pension providers to invest in domestic companies.

The winner of this contest may already be decided. Not because the government’s case is stronger, but by virtue of the fact that it has inserted a clause in its new pensions bill (set to become law next year) giving it the right to force schemes to comply with its requirements.

Chancellor Rachel Reeves says she wants to see savers get better returns. The real reason is that Labour needs to find the funds to pay for planned massive infrastructure projects that will keep the economy buoyant. It cannot afford to fund them entirely by itself, with tax revenues all used up as it raises spending elsewhere and little hope of increasing borrowing. But the pensions industry, which has agreed to consider investing more in UK infrastructure than it currently does, has drawn a line at the idea of coercion. It disagrees that this – or any – government’s economic policies should override the best interests of savers who are relying on pensions for their financial security in later life.

Lloyds Bank boss Charlie Nunn has described the proposal to force funds to invest in UK assets as a form of capital controls, and in conflict with funds’ fiduciary obligations to deliver the best returns for pensioners. The Pensions UK organisation has expressed its concern over the government’s “broad new powers to direct pension investment”, saying they introduce risks to savers and that ministers “should not be seeking to interfere” in how large, sophisticated FCA-authorised investors run pension fund money. 

Hymans Robertson, however, has weighed in with a radical proposal of its own. Pensions, it argues, should be viewed as a “force for good” and put to work to massively alleviate fiscal pressures on the government. Hymans says that by implementing certain measures such as removing upfront tax relief on pension contributions (a key incentive in getting people to save) and releasing surpluses from funds in good shape, many billions of pounds could be mobilised to work for the government. These would be extreme changes indeed to the pensions framework and would cause deep consternation among providers and savers alike if adopted. 

Finally, a more sensible proposal has been put forward by New Financial in partnership with Schroders and the stock exchange-led Capital Markets Industry Taskforce. New Financial argues that there should be a quid pro quo for the £49bn of tax relief handed to pension fund managers every year – in the form of a nudge to allocate more of their money to domestic equities. 

New Financial says defined-contribution (DC) schemes could allocate an additional £75bn of valuable capital to UK equities by the end of the decade, while remaining well within their recent historical norms and those of schemes in other countries.

Investment by UK DC schemes in domestic equities has fallen to 4.9 per cent, and is projected to fall further to 3.9 per cent within five years, compared to a global average for domestic equities in pension funds of 13 per cent. 

The think-tank stresses that there is no tension between taking a “globally diversified approach” and having a higher UK weighting. By adopting an equal weight basis across a small number of markets, diversification would be retained but with less risk. It cautions that US exceptionalism in any case will not continue in perpetuity. 

Investors seeking a lower level of domestic exposure would retain the right to switch out of a default fund that increased its UK equity holdings.

Why support the stock market's needs over the government’s? There are two reasons. First the UK’s tax policy currently harms the stock market by making it cheaper and therefore preferable to buy overseas shares. Far from encouraging fund managers to buy local (as other nations do), it actively discourages it. This must change. Second, doing so would open the door to entrepreneurial success in a way that government building projects cannot by transforming London valuations and encouraging new companies to list. The next Nvidia is not going to be born on a new housing estate, but it might well be created on a thriving London Stock Exchange. 

You can read more news and analysis on all other topics by visiting our website or clicking here.

Rosie Carr

Editor

Read more from The Editor