Shadow Chancellor Rachel Reeves has backed proposals for a £50bn 'future growth fund' for pensions. Credit: Christopher Furlong/Getty Images
The head of investment giant Schroders warned against intervention after Labor unveiled intervention plans to dictate how pension funds would invest £50bn.
Chief Peter Harrison says that pension plan managers should not be hindered in their investment choices in the face of wider backlash against the unintended consequences of limiting investment decision making.
Writing for The Telegraph (below), Mr Harrison said «we need to change our whole investment culture» if Britain doesn't want to fall further. lagging behind on the global stage.
He added: «We must ensure that their pension managers are not restricted in choosing these investments on their behalf.»
This came after the analyst The Tony Blair Institute center on Monday called for thousands of Britain's pension schemes to be pooled into just half a dozen £400bn superfunds to spur investment in business and infrastructure.
Labor MP Rachel Reeves, the Shadow Chancellor, also backed proposals for a £50bn «Future Growth Fund», with each defined contribution pension fund forced to commit 5% of its assets to it.
< p>This will lead to a response to Labor's criticism that the UK is trying to implement «capitalism without capital».
Ms Reeves said she did not believe a mandate would be needed as the pension funds would be willing to give up control of some of their assets voluntarily.
Mr Harrison disagreed and said the UK pension system had suffered from «decades of structural inefficiency and political confusion». Eliminating this “will free up large pools of risk capital.”
He said, “Risk capital is the oxygen of growth. The relative lack of this type of capital in the UK is a fundamental problem that all reforms must address.
“If we do it right, we can solve the persistent problem of UK companies falling behind on a lower valuation. than their American counterparts, which in turn makes British companies such attractive targets for overseas buyers.”
Considered one of the city's most powerful financial managers, Schroders is responsible for around £750bn in assets and boasts a rich history dating back to the early 19th century.
Mr. Harrison backed calls for thousands of smaller pension plans to be pooled into larger funds. He said 25,000 of the 27,000 defined contribution schemes whose pension benefits are based on investment value rather than fixed income have fewer than 12 members.
Small pension schemes are shrinking
due to the breadth of available investments. They cannot access many of the most promising growth assets,” he said.
Critics of the UK pension market have pointed to reforms under Gordon Brown that forced defined benefit pension schemes to invest in lower risk assets such as securities and other countries' sovereign debt.
Adopting more risk in illiquid investments such as infrastructure and early stage businesses would be important if the young population wants to enjoy financial security after retirement.
Security in Bonds — Asset Allocation
He said, «The quality of their retirement will depend on how much they manage to save during their working lives and how well they invest.» well-known pension entrepreneurs.
A former adviser to Boris Johnson said that The Pension Regulator and pension consultants were caught up in a «cult of gilding» which meant they favored risk-averse investments such as sovereign debt.
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Mr. Truell said: “The inefficiency of small pension funds is just money wasted. Some of these funds spend 5 per cent on overheads.
“Scalingly efficient funds, Canadian pension funds spend less than 0.5 per cent.
1,504 UK pension funds lag behind their competitors.
“They are very efficient, but also [have] the size and scale … to invest in complex things like infrastructure and make good returns. Britain has nothing like it.”
Sir Nigel Wilson, Head of Legal & General, it was said last week that the UK had largely missed out on the tech boom of the early 2000s and is now in danger of being left behind again.
“We don’t have a capital system that is in place for these people to achieve the same success as in the USA.
“To be better than in Europe should not be a benchmark. There is no European capital market equivalent to New York, London or Hong Kong, so we have to make [the system] function much better.”
Big changes in pensions could unlock the UK.” 39;full potential
Peter Harrison
The crucial pension debate has escalated over the past week, and rightly so. Much needs to change to unlock the full potential of the UK and connect savers to a wider range of assets.
It is critical to create the right ecosystem. First, we need to change our entire investment culture so that more retirees see the benefits of investing in real assets for both UK wealth and their own wealth.
It takes perseverance and education. We are all used to medical health checks, but financial health checks should be encouraged by the government, not left until retirement when it's too late.
Second, we must ensure that their pension managers are not constrained in choosing these investments on their behalf.
The right reform in terms of regulatory adjustments, incentives and industry restructuring can bring both.
It should help create a stronger, revamped investment ecosystem; one where individual savers are more connected to their assets. You could save money in Liverpool by looking at the sea, knowing that the wind farms dotting the horizon are part of your pension.
We have seen a flood of negative headlines that London is losing its luster as a global capital-raising hub. In fact, there is a lot of work being done on many fronts to achieve wide-ranging change.
2305 Share of UK shares held by UK pensions and insurance companies
Earlier this month, the Financial Conduct Authority proposed an overhaul of the UK listing regime, making it easier for firms to raise money in the London market.
Other reforms, including those related to the so-called «Solvency II» rules for insurers, are also moving forward. New investment instruments are being developed and launched, such as long-term asset funds. Overall, the government, regulators, and the financial industry are collaborating with strong forces of change.
In relation to pension assets, it is useful to distinguish between the large but shrinking defined benefit (DB) pension fund and the increasingly popular and growing basket defined contribution (DC).
Phase-out of defined benefit pensions
Private DB schemes currently control around £1.5 trillion in assets. They have significantly moved away from UK stocks in recent decades, and our study shows that DB's distribution of UK stocks has fallen from over 50% in the 1990s to under 2% in 2022. these benefits to retirees and not take unnecessary risks.
However, many of these schemes are currently in a healthy position and could shift the responsibility for future payments, along with assets, to insurers. This is why the ability of insurers to invest more freely in risky assets is such an important part of the larger picture of needed reform.
The DC retirement world is in stark contrast. Here, the final pension benefits of employees are directly related to the performance of their investments. A different risk dynamic applies. DC's asset pile is also rapidly growing rather than shrinking, and is owned by a much wider group of people. As of 2022, there were 18 million DC members compared to approximately 960,000 members of the DB scheme.
DC is projected to have an investment of £670 billion by 2030, bringing DC's total assets to approximately £1.3 trillion.
Upgrading these circuits is vital. Cleaning up decades of structural inefficiency and political confusion would free up huge stocks of risk capital. Risk capital is the oxygen of growth.
The relative lack of this type of capital in the UK is a fundamental problem that all reforms must address.
If we do it right, we can solve the persistent problem of UK companies falling further behind lower valuation than their US counterparts, which in turn makes UK companies such attractive targets for overseas buyers.
What steps to take? To begin with, the distribution of tens of thousands of small pension schemes needs to be consolidated. There are about 27,000 DC circuits, over 25,000 of which are ICs with fewer than 12 members.
Small disparate schemes are severely limited by the breadth of investments available. They are unable to access many of the most promising growth assets. Once consolidated, however, the schemes could develop the specialization and scale needed for broader investment, including in areas such as life sciences and technology, where the UK wants to lead. The government could also introduce structural incentives to attract pension capital to these sectors.
As these pages have argued over the past few days, fewer larger schemes should lead to investment in a wider range of assets.
The experience of other countries shows that this can bring higher returns. For example, Canada's PPIB, one of Canada's largest pension funds, invested $300 million in a single UK energy business in 2021 — more than the entire UK pension system invested in private equity and growth capital combined that year.
< p>It is worth noting that this Canadian scheme is also one whose ten year annual returns have averaged 69% higher than UK private sector DB pension returns.
Behind all this lies the complex question of risk and society's ability to understand and accept it. The decline in DB pensions and the rise in DC pensions clearly show how the younger generation is forced to take on more risk.
What they manage to accumulate in their working life and how well they invest will determine the quality of their retirement. We want to ensure that contributors demand their money to support projects that both work for the UK and bring personal profit.
Peter Harrison is the chief executive of the Schroders group
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