Across government and the city, policymakers and politicians are singing from the same hymn sheet: the City of London needs to start taking more risks.
Britain is facing a looming retirement crisis unless more can be done to boost pension saving returns, as the Telegraph has outlined in detail over the past week.
A combination of regulatory failures, undersaving and decades of inertia by fund managers have now come to a head, sparking a scramble to figure out what to do.
Jeremy Hunt is focusing on how the UK can maximise returns for savers while investing more in home-grown assets. By unlocking the billions stashed away in British funds for investment in things like infrastructure and start-ups, the Chancellor hopes to create a virtuous circle of better returns for savers, boosted economic growth and a reduction in reliance on foreign investment.
“How long as a nation do we want to be dependent on imported capital for our growth economy?” says Sir Jonathan Symonds, who is advising the Chancellor on how pension funds can get better returns. “It’s hard to accept that Canadian teachers invest more in the UK growth sector than UK teachers.”
More than a decade ago Sir Jonathan served as AstraZeneca’s finance chief, where it was his job to ensure the pension promises made to staff came good while costing his company as little as possible.
Today, Sir Jon is chairman of rival GSK and a member of the Capital Markets Industry taskforce, which is responsible for examining how the UK can scale up businesses and keep them here.
In his mind, policymakers and the private sector aren’t doing enough to deliver returns for savers because of a super-cautious investment approach, particularly for millions of members of so-called defined contribution (DC) schemes who rely on stock market returns for their retirement funds rather than the promise of their employer to sustain their incomes.
“Returns do matter for an increasingly significant part of the UK population,” he says, adding: “There is a very wide gap between the average returns of UK schemes compared to similar schemes in Canada and Australia.”
DC schemes in Britain have returned an average of 6pc a year over the last decade, compared with double digit returns in Canada. Compounded over 30 years, it makes a huge difference.
Downing Street believes the solution lies in scale. Britain is bedevilled by too many smaller pension funds that hit members with high running costs and are reluctant to risk their capital. There are currently over 5,300 defined benefit (DB) schemes in operation with an average size of just £330m.
The dynamic is even starker for DC schemes: there are around 26,990 in operation, according to the Pensions Regulator (TPR), and more than 25,000 of them have fewer than 12 members.
Rolling up these smaller pension schemes into a larger pool of investable capital would lessen the impact of losses from riskier bets and help money managers diversify their investments. Many smaller DC schemes are already being moved into bigger pots.
There are around thirty or so “master trusts” that collectively pool investments, including the National Employment Savings Trust (NEST) and Universities Superannuation Scheme. Together, these account for 23.7m DC memberships managing over £105.3 bn in assets.
Sir Jon argues that inertia is part of what perpetuates the problem and says more needs to be done to make people aware of how investment choices made today can make a difference to their retirements.
“Getting people to recognise at the right time that returns matter is a big issue,” he says,
While he refuses to talk about policy options that are on the table, he says consolidation is a very good idea.
“I think there needs to be some incentives to encourage defined contribution schemes to begin to either consolidate or pool assets,” Sir Jon says.
Some believe the Pensions Protection Fund, which normally serves as a safety net for retirement savers when companies go bust, could be used as a souped-up investment vehicle. The Tony Blair Institute will recommend in a report next week that sponsors of the smallest 4,500 UK defined-benefit (DB) schemes should be allowed to roll their schemes into the PPF to produce a “superfund” of around £400bn, propelling it into the top 10 global investment pots.
Sir Jonathan describes the PPF as a “hidden gem in the whole system” because it has the scale to take risks. The PPF already manages £39bn, and has a portfolio that ranges from stocks and bonds to property and even forests. In 2021, it bought a majority stake in Wenita Forest Products – the largest producer of timber in Otago, New Zealand.
A spokesperson for The Pensions Regulator said: “Consolidation is continuing at pace in the defined contribution (DC) sector and our position is clear: no saver should be in a poorly performing scheme that does not offer value for money.“
Trustees need to ask themselves tough questions: can I compete with the biggest master trusts? If not, it is likely time to move your members to a better value scheme and leave the market.”
The other major topic being discussed at the moment is whether pension funds should be compelled to invest in certain asset classes. Shadow chancellor Rachel Reeves has suggested Labour would be willing to force pension funds to back a £50bn growth fund that would invest in riskier start-ups.
While many start-ups fail, the few that succeed often deliver outsized returns and a willingness to back risky ventures can make a big difference to the performance of funds.
Sir Nigel Wilson, chief executive of Legal & General, has said “soft compulsion” might be needed to get pension funds to invest more in British growth companies.
However, many in the industry are against telling pension funds where to put their money.
Aviva boss Amanda Blanc insisted this week: “I don’t think compulsion is ever a very good thing in free markets. I don’t think making it mandatory is a good idea at all.”
The Chancellor has stated he’s uncomfortable with the idea of mandating where pension funds invest and it is understood that the government’s policies will instead focus on incentives rather than mandates. Mr Hunt will outline more details of his vision in July’s Mansion House speech.
Lord Darling, who was Chancellor during the financial crisis, says reforms are unlikely to unlock an immediate investment spree. He tried to reform the system himself during his time as Chancellor between 2007 and 2010. Then, Lord Darling created Infrastructure UK and set out an ambition for pension funds to bankroll everything from low-carbon energy to waste management projects.
Ultimately, the responsibility of protecting people’s retirement incomes means the industry is inherently nervous about taking big risks with pension savings.
“Trustees of pension funds have a duty to their pensioners,” Lord Darling says. “I don’t think you could ever require them to do something which they think is reckless or inappropriate.
“However, there’s a balance here. For example, pension funds own lots of buildings, and governments of both colours have said: ‘Wouldn’t it be good if we could invest in things like infrastructure?’ There are good reasons to want them to invest in infrastructure.
“A balance needs to be struck.”
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