Rachel Reeves House palace speech Last November was not without ambition, as he promised “the biggest pension reform in decades”, and two public consultations on what this means in practice are due to end in a few days.
As part of her “Invest, Invest, Invest” mantra to drive growth, the Chancellor’s Autumn Budget announced £100bn of capital spending in the next five years. To increase this amount without scaring away the market's gilded horses, Reeves wants to consolidate pension funds into “mega funds”, which would then invest more in UK “private assets” – venture capital and infrastructure.
This 'amplification' applies to the £400bn defined benefit scheme for local government employees in England and Wales (Scotland's £60bn local government scheme is not included) and to defined contribution workplace pensions for private sector employees. The government also wants pension savers in the capital to do so Hold more in UK stocks.
Regardless of the political rhetoric, these “reforms” appear to be based on incomplete and flawed analysis.
For workplace pension funds in the capital, the government wants a minimum size of £25bn, preferably up to £50bn, with fewer “default” investment options. It is important that the changes will not come before 2030, that is, after the next general elections.
The UK currently has around 30 “master funds” licensed by the Pensions Regulator, and a further 30 “contract-based” providers, with combined assets of £480bn.
To be sure, DC pensions need a minimum asset size to spread out fixed costs and encourage good governance, but the government's analysis of why the threshold should reach £25 billion is weak, and its comments on Canadian and Australian pensions are selective or irrelevant. .
For example, all of the “Maple 8” Canadian pensions that Reeves is so keen on are either public sector defined benefit plans — including Ontario's three plans for teachers, medical staff and local government employees — or fund Canadian government pensions, so he told us nothing about Pensions in the UK capital.
And yes, the Australian 'super funds' in the capital are larger in absolute terms than UK pensions, but they have been in operation much longer, and their annual contributions have been much higher (at the same time, the UK government has Delay review to increase the minimum automatic enrollment amounts). But Australia is also much less concentrated than the UK, with the ten largest investment schemes holding a much smaller proportion of total assets than the UK.
What do savers in the capital get from investing in the UK, other than the patriotic glow of buying war bonds?
The analysis published by the Government Actuary's Department to support the Palace's letter is not encouraging. He concludes that the potential risk-adjusted returns for savers in developing countries if they switch from holding international – especially US – stocks to UK stocks and private assets, are about the same. Any differences over 30 years of regular savings are lost in rounding.
Since the potential returns are identical, savers in developing countries should make their investment decisions on the second-order basis of maximizing international diversification and minimizing costs.
British stocks account for 4 per cent of the MSCI World Index – US stocks, dominated by big technology companies, make up 70 per cent. But the UK's equity allocation to developing country pensions is already 8 per cent, twice the 'neutral' weight.
There are good reasons why UK investors are overweight in the UK – lower management fees and costs, no need to hedge the currency against sterling, and many UK companies operate overseas, which provides some international diversification anyway.
The Chancellor of the Exchequer can always turn the tide, and provide support to British stocks, by restoring the dividend tax break that was abolished in 1997 by the former Labor Minister, Gordon Brown. The main reason Australian savers hold Australian shares appears to be the Australian dividend tax credit. Surely doing this in the UK would be expensive, surely it would be better to give direct tax breaks to companies that invest in their businesses?
As for reducing management costs, private equity fees in the UK are much higher than those charged for passive public equity trackers. To make matters worse, the performance fee, paid in addition to the annual fee, is excluded from the maximum 0.75 percent automatic enrollment fee.
Meanwhile, the new pensions minister, Emma Reynolds, has been harshly critical of us warning “The government could force pension funds to invest more in UK assets.” It does not explain how this might work in practice, taking into account the statutory and statutory fiduciary duties of pension trustees to act in the “best interests” of their members.
She has hinted that the government may cut tax breaks on offshore investments, which would undermine confidence in retirement savings, which are fragile at the best of times.
Over the years, various foreign governments have tried to dictate how pensions should be invested, but none have succeeded. Let's hope the Labor government quietly abandons the idea of ”forcing” British pension funds to invest in the UK.
John Ralph is an independent pensions advisor. tenth: @Johnralph1
