Rachel Reeves to shake up pensions to try to boost growth
Getty ImagesChancellor of the Exchequer Rachel Reeves will introduce what she calls “the biggest pension reform in decades” to boost economic growth.
The UK government wants to merge the UK local government pension schemes – a group of funds with £354bn of investments under management – into a handful of “pension mega-funds”.
It is hoped that the changes will lead to billions of pounds of investment in the UK in areas such as energy infrastructure, technology start-ups and public services.
Reeves told the BBC that UK public sector pension funds were not large enough to generate good returns for UK savers, but critics said the measures could put savers’ money at risk.
Speaking ahead of her first speech as chancellor of the exchequer at an annual gathering of luxury property investors in London, the chancellor told the BBC she wanted Britain’s pension schemes to be more like those in Canada and Australia.
In these countries, the pensions of local government workers, such as teachers and civil servants, are pooled into a handful of funds that are able to invest on a large scale around the world.
“They probably have the best pension fund in the world,” Reeves said.
Pensions reform plans were a cornerstone of the speech, which is seen in many businesses Criticism of budget increase in employers’ national insurance contributions.
She told the BBC she was “not immune to these criticisms, but there is a need to increase taxes” to shape public finances and “properly fund” public services.
The government plans to merge 86 council pension funds – representing 6.5 million pensions and managed by local government officials – into “mega funds” managed by fund managers.
These larger funds will also be required to “specify the pool’s investment objectives in the local economy.”
The government also wants to set a minimum size limit on defined contribution schemes, which manage around £800bn of investments, to encourage the consolidation of around 60 different multi-employer schemes.
The government said its reforms could “unlock” £80bn worth of investment into the UK.
Reeves said: “Britain’s pension funds are too small to invest in a way that gives people a good return on their savings for retirement and helps our economy grow.”
She added that it “simply makes no sense” that Canadian teachers and Australian professors are more likely than British savers to invest in many long-term UK assets.
Risk and reward
However, critics say these schemes could put savers’ money at risk.
Tom Selby, director of public policy at investment platform AJ Bell, said: “There are dangers in conflating government objectives to drive investment in the UK with people’s retirement outcomes, as all risk is borne with members’ money. “
He said the current system encouraged trustees to “provide members with the highest possible retirement income” rather than focus on UK-wide economic growth.
This sometimes means investing in things like US stocks and avoiding UK investments that the government is keen on.
While larger funds can mean greater returns, they can also mean greater risk, with Canadian pension fund Ontario Municipal Employees Retirement System being the largest investor. Thames Water in trouble.
Others say larger funds may struggle to find enough large UK projects to invest in.
Jon Greer, head of retirement policy at wealth management firm Quilter, said: “Large funds need large, reliable projects to generate returns, but the market may struggle to provide enough of these opportunities, especially in the infrastructure sector. “
He added that if “too much money is chasing too few viable investments,” funds could be forced into “riskier” investments.
Shadow chancellor Mel Stride said the Conservatives “will be paying close attention to the details set out by Rachel Reeves, particularly around the rules on where investments can be made”.
