Once upon a time, pensions ensured that people could live a comfortable and happy retirement.
Not any more. Pensions are a magic wand to wave at a variety of UK economic problems, from an ailing stock market or low productivity to regional inequality. To the extent that they can play a role in tackling these issues, it will be a long and involved process. Attempting a short-cut through political decree would be unwise.
There are a couple of distinct issues here. First, private defined-benefit schemes — the dinosaurs of pensions past — have switched from equities into bonds as they closed and members approached retirement.
That is the biggest factor behind the allocation of money from UK pensions to the UK stock market falling from 53 per cent in 1997 to 6 per cent in 2021, and it is not going to change.
Defined-contribution schemes still allocate more than half their assets to equities, according to think-tank New Financial, but everyone — including asset managers and insurers — has also shifted away from UK stocks seeking better opportunities overseas. Sad but true.
Second, there is the question of infrastructure and private equity investment, which the government would like more of — both to improve pension fund returns and to help build back better, level up, or further the soundbite of the moment.
There is an opportunity to do more with local government pension schemes, which I have written about before. But the current focus seems to be on defined-contribution schemes, with about £550bn of the pension market’s total £2.8tn in assets.
The great hope is Australia, land of opportunity and a well provided-for, defined-contribution market where big pots of money make sizeable allocations to unlisted assets.
The Australian superannuation system has almost A$3.5tn (£1.9tn) in assets after three decades in which contributions have been steadily raised, pots consolidated and investment diversified. The UK is only 10 years into the auto-enrolment of most workers into pension savings.
The idea that there is an overnight-success version of Australia’s model is for the kookaburras. The immutable right of pension trustees to invest as they see best on behalf of their members runs through this debate. A legal compulsion to invest would probably be in conflict with trust law and trustees’ duties, according to experts.
To complicate matters further, defined-contribution assets are roughly equally split between trust-based schemes (regulated by The Pensions Regulator) and contract-based structures (generally operated by insurers and regulated by the Financial Conduct Authority). Each would probably need to be handled differently.
Pensions trustees — after years of following the guiding star of low fees — are being pushed to take more risk at a much higher cost. That takes time. The vehicle created by the government last year to enable pension investment into illiquid assets, the Long Term Asset Fund, has barely launched: only two have been authorised, although there is a pipeline developing. There remains wariness about paying layers of fees to intermediaries, where schemes do not have the heft to invest directly.
One lesson from the Australian experience, argues Gregg McClymont of IFM Investors, is that the occupational schemes created their own vehicle (IFM) to pool resources and avoid leakage of fees to third parties. “Pensions is not a cottage industry,” says McClymont, and this approach achieved scale quickly.
The Australian schemes have steadily consolidated over time, with IFM’s owners falling from 30 to 17. If the government wants to wield a big stick, pooled resources and consolidation is the place to do it.
Another factor behind Australia’s success was that the system came together when its states were essentially privatising infrastructure. In other words, there was loads of good stuff to buy. The UK pensions and investment industry complains that the government is not bringing forward opportunities in clean energy, housing, or transport infrastructure in anywhere near the quantity required — either for the country or their investment needs.
This is where the carrots come in. “It is not pension regime reform that is needed to increase investment in UK assets . . . but coherent, stable and sustainable economic and industrial policies to make the UK fundamentally more attractive to investors,” says Andrew Warwick-Thompson, professional pension trustee and former regulator. “In a global market competing for their capital, investors need to be attracted not coerced.”