Unleash our pension power, says RUTH SUNDERLAND: Billions languishing in supposedly low-risk gilts could be used to reboot UK economy
- There is huge untapped investment potential locked up
- Gilts’ return has been low, crowding out potential higher-return investments
- Overseas pension funds plough billions into our water, airports and energy
One former colleague of mine used to greet any reference to pension funds with a deep groan and a cry of: ‘Boring!’
The minutiae can certainly be tedious. One thing about pension funds, however, is very interesting indeed.
They are sitting on mountains of money. And they have billions of it languishing in supposedly low-risk gilts when it could be used to reboot the UK economy.
Behind Jeremy Hunt’s Budget next month lies an uncomfortable reality. Unless we act soon, Britain will be mired in the quicksand of low growth, low productivity, high taxes, high political turnover and high anxiety.
The current debates revolve around GDP growth or the lack of it, and whether or not we are in recession. Kier Starmer fell into that trap when he pledged to make the UK the fastest-growing economy in the G7.
Loosening the shackles: There is huge untapped investment potential locked up, with far too little going into infrastructure and venture capital
But comparisons with the gross domestic product of other countries are irrelevant to the daily lives of many voters. What people want are concrete measures to make their lives better and more prosperous.
They don’t have to be particularly Left-wing to be disillusioned by some of the divisive, greedy and rapacious variants of capitalism on display in recent years.
Many of us want a more inclusive, long-term capitalism that improves our lives by investing in healthcare, education, housing and transport. The most urgent problems facing the economy now are infrastructure, de-carbonising and an ageing population – which brings us back to pensions.
UK funds are a mix of final salary, stock market linked and public sector schemes. There is huge untapped investment potential locked up in these funds – which have been pushed by regulators to invest heavily in gilts – with far too little going into infrastructure and venture capital.
Gilts are supposedly ultra-safe government bonds. But they have resulted in low returns and crowded out other, potentially higher-return investments.
A further irony is that overseas pension funds have ploughed billions into our water, airports and energy sectors. So UK infrastructure is acting as a lucrative piggy bank for retirees in Canada, Australia and the US whilst British pensioners are missing out.
Moves are afoot to unleash pension power but it’s all painfully slow. Take local authority schemes, which in England and Wales have assets of nearly £300billion between them. As part of levelling up, the Government has said it wants them to set a target of having 5 per cent of assets in local projects, which it claims would unlock £16billion in investment.
And reforms to Solvency II rules for insurance companies could release up to £100billion for investment over the next decade, but Hunt must get on with it.
One reason change has been so glacial is the legitimate concern that funds do not pump members’ money into risky projects.
The current balance, however, is wrong. Retirees are missing out on the opportunity for better returns. Equally important, the economy is being starved of capital that could be put to use to improve productivity and to create high wage jobs.
This is an area where the Chancellor should be bold in his Budget. He should put some welly behind existing reforms and consider new measures, for instance setting compulsory thresholds for funds’ investment in infrastructure.
Pensions need not be dull: they could be a powerful secret weapon.
