The secret to reinvigorating the UK economy lies in the hands of pension schemes; a report by the Resolution Foundation has added to the debate around pension funds as the solution to the underinvestment issue.
The UK is in a period of economic stagnation and will continue to decline unless it takes decisive action to improve its investment performance, according to a stark new report from Resolution Foundation.
Business investment is the focus of the report, Beyond Boosterism. This form of investment is responsible for around two thirds of national investment. It fell in the 2000s as a share of GDP, further declined in the financial crisis, and has remained flat since 2016, according to the report.
Bringing the UK back to life must involve more investment, the report argues. Pension schemes should play a critical role.
A vital reform that needs to happen is a return to more concentrated ownership of UK companies by pension schemes, the report suggests.
At present, UK defined contribution (DC) schemes mostly invest through pooled investments and defined benefit (DB) schemes – “formerly the anchor investors in the UK stock market, have largely vacated it”.
The report continues: “Our DC and DB pension funds in aggregate now allocate only 2 per cent of their assets to directly held UK equities.”
How DB investment should change
With the majority of DB schemes now in surplus, many schemes are looking to complete insurance transactions to take pension scheme risk off company balance sheets. “These insurance companies would provide scale but, due to their regulation, will largely hold the transferred assets in very low-risk assets”, the report says.
Policymakers should intervene to offer DB schemes other routes to remain part of the pensions landscape which would give them the opportunity to remain invested in growth assets, the report argues. The government should create large superfunds which follow a similar model to the Pension Protection Fund (PPF), it recommends.
The remit of the PPF itself should also be expanded into a state consolidation option, the report continues. The PPF could allow still-solvent employers the chance to negotiate entrance to it, the report continues.
The report says: “These reforms will create several large DB funds with both the incentives and capabilities to invest actively in UK equities – monitoring and disciplining management to run businesses for long run value.”
How to turbocharge DC consolidation
Consolidation of DC and Local Government Pension Schemes (LGPS) has been a priority for policymakers in recent years, but primarily from a cost perspective, the report acknowledges.
It recommends “turbocharging” the consolidation process so that DC schemes are big enough to invest actively and directly hold shares, similarly to how the UK’s largest DC master trust, Nest, already invests.
The report says: “To accelerate the consolidation of DC schemes, we recommend that the Government goes ahead with setting stringent value-for-money tests, and mandates funds which fail to meet these to transfer assets to a number of authorised Master Trusts (multiemployer DC pension trusts) that will act as consolidators.”
Meanwhile, LGPS schemes’ £300bn of assets should be pooled into one consolidated pension fund, the report suggests, giving it similar scale and expertise to Dutch and Canadian super-funds.
The report concludes: “The result would be a pensions industry that looks more like those in Australia or Canada than today – remaining in private hands, making its own decisions about which assets to invest in, but delivering lower costs and with the scale that makes owning and actively managing significant chunks of UK firms feasible. This would deliver at least as good outcomes for savers and, crucially, significantly better outcomes for the UK economy as a whole.”
Ian Bell, head of pensions at accountancy firm RSM UK, commented: “The fiduciary aspects of the trustee’s role, to make decisions in the best interests of individual members, has been a protective measure that has been in place for decades, and this will present a big obstacle.
“Before anything like this is attempted, cross party agreement would have to be put in place to prevent long term pension savings once again being used as a short-term piggy bank for government ambitions. I expect trustees will, be following this debate with interest, but will ultimately be questioning the motive, and challenging the benefit that it may bring for their members.”
