Jeremy Hunt is getting it in the neck in some quarters for being insufficiently radical in his plan to “unlock” capital from the UK’s £2.5tn pot of pension savings and encourage funds to do patriotic work in boosting UK startups and UK infrastructure schemes.
In truth, we should give thanks for the low-octane nature of the chancellor’s “Mansion House reforms” as they relate to pensions. Anything resembling a command from the Treasury to “buy British” would have backfired. Incrementalism, in the form of a nudge to direct a few more million quid towards promising UK companies, was the only viable strategy.
Of course the flagship voluntary “compact” with nine of the UK’s largest pension providers – the likes of Aviva, Legal & General and Phoenix – sounds weak. We’re talking only about defined contribution (DC) schemes, meaning those in which savers bear the investment risk, and the objective of the compact is merely to allocate at least 5% of default weightings in funds to unlisted equities by 2030. Thus one should treat with caution Hunt’s boast that £50bn of investment into high-growth companies “could” be unlocked by the end of the decade if the rest of the DC market also steps up.
But consider the dangers in alternative approaches. Compelling funds to allocate any fixed percentage would rightly have caused a riot among pension fund trustees whose first duty is towards scheme members. Trustees must be free to dodge obvious risks that come when pools of money, potentially, slosh in a new direction.
One of those risks is that the era of easy pickings for infrastructure investors is over. The owners of Thames Water, for instance, are discovering that the game is sometimes more complicated than plugging numbers into a spreadsheet and watching returns compound for a couple of decades.
There is also a finite number of infrastructure schemes to be funded. If too much money chases too few opportunities, returns for savers will fall. Meanwhile, the idea that access to startups represents a golden ticket is not quite accurate: picking early-stage winners is hard.
Thus an aspirational 5% allocation sounds a pragmatic outcome. Younger savers, further away from retirement, should have a greater exposure to such higher-risk assets; and, since DC schemes already invest overwhelmingly in equities, it’s hard to grumble about a shift towards the unlisted variety. The reform is really a case of removing restraints, such as daily pricing liquidity, that have been an artificial barrier against DC funds investing in private assets. In that regard, it is sensible.
On the defined benefit (DB), or final salary, side of the pensions market, Hunt is right to think there’s potential in combining local authority schemes in the interests of scale and ability to take on a wider spectrum of risk assets.
But the “call for evidence” on an expanded role for the pension protection fund, the pensions lifeboat, suggests the chancellor has heard the warnings from some big DB providers that a bad outcome would be one that wrecks the “buy out” market that enables corporate sponsors of pension schemes to offload both assets and liabilities. Quite: the job of DB schemes is to fill the coffers to meet contractual pension obligations. If that means the safety of gilts and bonds, as it usually does, so be it.
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In the round, then, Hunt has produced a workable plan that carries wide support in the pensions industry and thus has a fair chance of generating a slug of extra capital for startups and productive assets. Just don’t expect miracles. Real growth requires a real economic plan.
