Across the government and the city, policymakers and politicians are singing the same anthem: the City of London needs to take more risks.
Britain is facing a looming pensions crisis unless more can be done to raise returns on pension savings, as the Telegraph detailed last week.
A combination of regulatory failures, subpar savings and decades of fund manager inertia has now come to a head, leading to a struggle to figure out what to do next.
Jeremy Hunt focuses on how the UK can maximize returns for savers while investing more in homegrown assets. By freeing up the billions stashed away in UK funds for investment in things like infrastructure and start-ups, the Chancellor hopes to create a virtuous cycle of better returns for savers, a boost to economic growth and a reduction in dependence on foreign investments.
“How long do we as a nation want to depend on imported capital for our growth economy?” says Sir Jonathan Symonds, who advises the Chancellor on how pension funds can achieve better returns. “It is hard to accept that Canadian teachers invest more in the UK growth sector than British teachers.”
More than a decade ago, Sir Jonathan was head of finance at AstraZeneca, where his job was to ensure that pension promises to staff were delivered while costing the company as little as possible.
Today, Sir Jon is chairman of rival GSK and a member of the Capital Markets Industry task force, responsible for exploring how the UK can scale and keep companies here.
In his view, policymakers and the private sector are not doing enough to deliver returns for savers due to an extremely prudent investment approach, particularly for millions of participants in so-called defined contribution (DC) plans who rely on stock market returns for their pension funds rather than the promise of their employers to maintain their income.
“Returns matter to an increasing segment of the UK population,” he says, adding: “There is a very large gap between the average returns of UK schemes compared to comparable schemes in Canada and Australia.”
DC schemes in Britain have averaged 6 percent per annum over the past decade, compared to double-digit returns in Canada. Compiled over 30 years, it makes a huge difference.
Downing Street believes the solution lies in scale. Britain is beset by too many smaller pension funds hitting members with high operating costs and unwilling to risk their capital. There are currently over 5,300 defined benefit (DB) schemes in operation with an average size of just £330 million.
The dynamics are even stronger for DC schemes: according to the Pension Supervisor (TPR), there are about 26,990 in operation, of which more than 25,000 have fewer than 12 participants.
Rolling these smaller retirement plans into a larger pool of investable capital would reduce the impact of losses on riskier bets and help asset managers diversify their investments. Many smaller DC schemes are already being moved to larger pots.
There are about thirty “master trusts” that collectively pool investments, including the National Employment Savings Trust (NEST) and Universities Superannuation Scheme. Together these account for 23.7 million DC memberships managing more than £105.3 billion in assets.
Sir Jon argues that inertia is part of what perpetuates the problem and says more needs to be done to raise awareness of how investment choices made today can make a difference to their retirement.
“Getting people to understand at the right time that returns matter is a big deal,” he says,
While he refuses to talk about policy options on the table, he says consolidation is a very good idea.
“I think some incentives are needed to encourage defined contribution plans to start consolidating or pooling assets,” says Sir Jon.
Some believe that the Pension Protection Fund, which normally serves as a safety net for pension savers when companies fail, can be used as a ramped-up investment vehicle. The Tony Blair Institute will recommend in a report next week that sponsors of the smallest 4,500 UK defined benefit (DB) schemes should be able to include their schemes in the PPF to produce a “super-fund” of around £400bn, which would it in the top 10 global investment pots.
Sir Jonathan describes the PPF as a “hidden gem in the whole system” because it has the scale to take risks. The PPF already manages £39bn and has a portfolio ranging from stocks and bonds to real estate and even forests. In 2021, it purchased a majority stake in Wenita Forest Products – the largest timber producer in Otago, New Zealand.
A spokesperson for The Pensions Regulator said: “Consolidation in the Defined Contribution (DC) sector continues at a rapid pace and our position is clear: no saver should be in an underperforming scheme that does not offer value for money. ”
Trustees have to ask themselves hard questions: Can I compete with the largest master trusts? If not, it is probably time to move your members to a more beneficial arrangement and exit the market.”
Another important topic that is currently being discussed is whether pension funds should be obliged to invest in certain asset classes. Shadow Chancellor Rachel Reeves has suggested Labor would be willing to force pension funds to back a £50bn growth fund that would invest in riskier start-ups.
While many startups fail, the few that succeed often generate exorbitant returns and a willingness to support risky ventures can make a big difference to fund performance.
Sir Nigel Wilson, CEO of Legal & General, has said “soft coercion” may be needed to get pension funds to invest more in UK growth companies.
However, many in the industry are against telling pension funds where to put their money.
Aviva boss Amanda Blanc insisted this week: “I don’t think coercion is ever a good thing in free markets. I don’t think it’s a good idea at all to make it mandatory.”
The Chancellor has stated that he is not comfortable with the idea of mandating what pension funds invest in and it is clear that government policy will instead focus on incentives rather than mandates. Mr Hunt will outline more details of his vision in Mansion House’s speech in July.
Lord Darling, who was chancellor during the financial crisis, says reforms are unlikely to trigger an immediate wave of investment. He attempted to reform the system himself during his time as Chancellor between 2007 and 2010. Lord Darling then set up Infrastructure UK and set an ambition for pension funds to fund everything from low-carbon energy to waste management projects.
Ultimately, the responsibility of protecting people’s retirement income means the industry is inherently nervous about taking big risks with retirement savings.
“Pension fund managers have a duty to their pensioners,” says Lord Darling. “I don’t think you could ever ask them to do something they think is reckless or inappropriate.
“However, there is a balance here. For example, pension funds own a lot of buildings, and governments of both colors have said, “Wouldn’t it be good if we could invest in things like infrastructure?” There are good reasons for wanting them to invest in infrastructure.
“A balance has to be struck.”
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