Britain has one of the largest pension markets in the world, worth more than a trillion. It is little wonder then that the Government is keen to unlock this money to pour into its infrastructure projects – especially as net foreign direct investment hit a record low of net negative £233bn in 2021, according to official figures.
The Shadow Chancellor suggested this week that Labour would be prepared to force pension funds to invest in a proposed £50bn “future growth fund” that would back homegrown, British ventures.
Yet the pensions industry’s agenda, and the interests of its savers, do not always align with that of the Government. Nest has refused to back nuclear projects such as Sizewell C, and most pension funds have strict investment mandates that exclude nuclear assets from their portfolios.
And while the Government hovers over defined contribution pensions, Britain’s biggest pool of assets is tied up in old fashioned defined benefit schemes. These promise an income in retirement, regardless of stock and bond market moves. These generous schemes are now largely closed outside of the public sector. They mostly own bonds, with around a quarter of all British gilts held by insurance firms and pension providers.
Sir Steve Webb, a former pensions minister, said that the Government should be focusing on unlocking the value in these much larger “defined benefit” pension schemes. “The Government has been scared by BHS, Philip Green and Carillion – but we now have very risk averse regulation, and these types of pension funds are awash with cash. Not to take investment risk here is a terrible waste of a £1.5 trillion market that is producing terribly low returns,” he said.
Mr Peaple added the pensions regulator’s proposals for new funding rules could further limit these older final salary schemes.
Earlier this year, the Universities Superannuation Scheme, one of the few open defined benefit schemes left outside of the civil service, told The Pensions Regulator, the industry watchdog, it had “deep misgivings” around draft proposals that would curb its ability to invest in British infrastructure projects and generate strong returns for its savers.
In a letter to the regulator, the fund wrote: “We firmly believe that pension fund capital can play a critical role in accelerating growth, increasing long-term investment in infrastructure and supporting the transition to net zero.
“A DB funding regime which does not appropriately reflect USS’s open status and long-term horizons…may reduce its ability to support such objectives, place unnecessary demands on our sponsoring employers and be to the detriment of our members.”
“The pensions industry has long celebrated the success of auto-enrolment, which was hailed as a rare political success story when it was introduced a decade ago.
