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Rachel Reeves Mansion House speech In November 2008, he promised “the biggest pension reform in decades” and two public consultations on what that means in practice will close in a few days.
The Chancellor’s Autumn Budget announced £100bn of capital spending over the next five years to drive growth as “invest, invest, invest”. To grow this without spooking gilt market horses, Reeves wants to merge pension funds into “megafunds”, followed by UK “private assets” – venture capital and infrastructure.
This “mass increase” applies to the £400bn defined benefit scheme for local government workers in England and Wales (excluding Scotland’s £60bn local government scheme) and the defined contribution (DC) workplace pension for private sector workers. The government also wants DC pension savers Hold more in UK stocks.
Political rhetoric aside, these “reforms” seem incomplete and based on flawed analysis.
For DC’s workplace pension fund, the government wants at least £25bn, and preferably up to £50bn, with fewer “default” investment options. It is vital that the changes do not come before 2030, after the date of the next general election.
The UK currently has around 30 “master trusts” and another 30 “contract-based” providers, with assets of £480bn, authorized by the pensions regulator.
DC pensions certainly need lower asset levels to spread fixed costs and encourage good governance, but the government’s analysis of why the limit should be raised to £25bn is weak, and the commentary on Canadian and Australian pensions is either selective or irrelevant.
For example, all of the Canadian “Maple 8” pensions Reeves is so excited about are either public sector defined benefit plans – including the three Ontario schemes for teachers, medical workers and local government workers – or they’re subsidizing Canadian provincial pensions, so say nothing about UK DC pensions. .
And yes, Australia’s DC “superfunds” are definitely bigger than UK DC pensions, but they’ve been around a lot longer, and have much higher annual contributions (meanwhile, the UK govt. By delaying the review to increase the minimum self-registration amount). But Australia is much smaller than the UK, with the top 10 largest schemes holding much smaller total assets than the UK.
What do DC savers get out of investing in the UK other than buying War Bonds, apart from patriotism?
The Government Actuary Department’s analysis published in support of the Mansion House speech is not encouraging. It concludes that risk-adjusted returns for DC savers are similar if they switch from international stocks – particularly US – to UK stocks and private equity. Differences in fixed savings of more than 30 years have been lost in the circular arrangement.
Since the probability of return is the same, DC savers should make their investment decisions secondary to maximizing international diversification and minimizing costs.
UK stocks represent 4 per cent of the MSCI world index – US stocks held by big tech companies make up 70 per cent. But UK equity for DC pensions is already 8%, which doubles the “neutral” weight.
There are good reasons for UK investors to gravitate to the UK – lower management fees and costs, no need to peg the currency to sterling, and many UK companies operate overseas, providing some international diversification anyway.
In the year The chancellor could always tip the balance and subsidize UK stocks by reinstating the dividend tax credit, which was abolished by former Labor chancellor Gordon Brown in 1997. The main reason for Australian savers to hold Australian shares appears to be the Australian capital gains tax credit. It is very expensive to do this in the UK, and surely it is better to give tax breaks to companies that invest in their businesses?
In terms of reducing management costs, UK private equity fees are significantly higher than public, passive equity trackers. To add insult to injury, performance fees, paid in excess of annual fees, are excluded from the 0.75 percent auto-enrollment fee limit.
Meanwhile, the new pensions minister, Emma Reynolds, has also given us a serious look. Warning “Government could force pension funds to invest more in UK assets”. She did not explain how this would work in practice, given the statutory and common law fiduciary duties of pension trustees to protect their members “in the best interest”.
She has hinted that the government may cut tax breaks on overseas investments, which will certainly reduce reliance on retirement savings, which are fragile at the best of times.
Over the years, various overseas governments have tried to decide how to invest pensions, none of them have had good results. Let’s hope a Labor government quietly drops the idea of ”forcing” UK pension funds to invest in the UK.
John Ralph is an independent pensions consultant. X: @johnralfe1
