Think big: Think tank suggests creation of regional superfunds

The report, Investing in the Future: Boosting Savings and Prosperity for the UK, seeks to reverse the decline of capital markets and create vast pension funds similar in scale to those in Australia and Canada. 

Despite the UK having one of the largest pension markets in the world, overseas pensions invest 16 times more in British venture capital and private equity than domestic public and private pensions – something lord mayor of London, Nicholas Lyons pointed out recently, when floating his own call for a £50 billion private equity superfund fuelled by mandatory contributions from defined contribution (DC) funds. 

The TBI proposals would also see the Pension Protection Fund (PPF), the UK’s £39 billion lifeboat scheme for corporate pension plans, take on a new role, as a fund consolidator, following the necessary changes to legislation. 

Failure would no longer be the way into the PPF’s exclusive club, but instead employers of the smallest 4,500 UK defined benefit (DB) schemes could opt in, while preserving benefits and receiving tax incentives to do so, said the report said. 

This new £400 billion fund – GB Savings One – could allocate up to £100 billion in UK infrastructure, companies and start-ups, according to the document. 

This model would then be implemented across the UK in a series of regional, not for profit funds of between £300 billion and £500 billion in assets. These regional funds would then start to absorb the remaining DB funds – both private and public sector –  in order to generate “better, more secure” returns for millions of pensioners, while strengthening provision for the “entire generation stuck with inadequate provision” since DB funds began closing two decades ago. 

Mandating asset allocations is not the way to go and should be resisted. Compulsion does not allow responsible and sensible investment decisions

David Brooks, Broadstone

Great idea for DB, but not DC

Romi Savova, chief executive of PensionBee, said the proposals put forward by the Tony Blair Institute seem sensible and a natural evolution of a structure already in place. For DB schemes, that is.

“There are huge benefits to removing the management of these pension plans from companies and placing them together in a ‘superfund’ – especially for the UK economy. A bonus of using the Pension Protection Fund for this, is that there is some level of security for savers, as well as a strategy for long term investment growth.

“However, defined contribution pensions are a different story as, unlike defined benefit schemes, there is no promise to savers to pay them a pension; the pension income in retirement depends on the investment return. So there is already a huge incentive to seek the best returns for defined contribution schemes. Unfortunately over the last decade or so, the UK has been a poor return environment. 

“If the change in DB investment works to kickstart the UK economy, then DC funds will naturally invest here for returns. The government’s ‘value for money’ framework helps create transparency and comparability across DC pensions, but  with this type of pension, where  individuals are responsible for their own retirement pots, it’s not possible to have a mandated investment strategy.”

Compulsion makes bad investment choices

David Brooks, head of policy at Broadstone is not convinced. It seems to him that one fact has been – perhaps deliberately – overlooked. It is not the job of trustees to fix the country, but balance any goals for society with their fiduciary duty towards their beneficiaries.  

“Ultimately those who stand to lose out in most of these forced ‘solutions’ are members, unless there is to be yet further pressure/cost passed on to those sponsors still on the hook for a DB funding deficit.”

DB trustees invest to ensure that benefits promised are paid in full. That means not investing to make as much money as you can, but holding as much as you need. The regulator regularly tells them to manage and reduce risk, while the government’s new funding regulations would push even further in this direction, said Brooks.

DC trustees are charged with putting responsible options in front of their members and providing default solutions where funds will grow without excessive risk to provide retirement income in the future.

“Mandating asset allocations is not the way to go and should be resisted,” said Brook. “If an asset can be demonstrated to provide attractive risk adjusted returns for a cohort of investors, then people will invest. Make them good value and accessible to pension schemes of all sizes and they will invest.  

“But compulsion does not allow responsible and sensible investment decisions. And if you have a market where some players are forced to hold assets while others come and go more freely, then those with the freedom will exploit those who are tied in, potentially cashing in on the gains and selling to avoid undue losses.  

“This cannot be good news for our country’s pension savings.”