Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Pension funds are the answer to the UK’s economic stagnation — so say ministers, policy experts and just about everyone else. Any discussion about how to attract more investment into UK infrastructure, start-ups or equities now involves Britons’ retirement savings.
Doubtless the same will be true at the Budget this coming week. UK chancellor Jeremy Hunt last year grabbed headlines with efforts to channel more defined contribution funds into private companies. But ministers (and opposition politicians) have also been eyeing local government defined benefit schemes as an easy pot of money to unlock growth. It is not that simple.
The Local Government Pension Scheme has more than 6mn members. If it were a single fund, it would rank among the top 10 biggest in the world, with more than £365bn of assets.
It is easy to see why the government might see this as an easy way to rival the likes of Canada’s big public sector pension funds. In England and Wales, however, the LGPS is divided into 86 individual funds.
This is a problem. Larger funds can access asset classes such as private markets that might otherwise be closed off to small pots. Economies of scale can also mean superior negotiating power with external managers, giving members better value.
This is not a new idea. George Osborne in 2015 said funds should be pooled into six “British wealth funds”. The results are mixed. There are now eight pools that vary in size. A government consultation published last year said only £145bn, or 39 per cent, of assets had been transferred from single funds to the pools. Funds in the Border to Coast Pensions Partnership, for example, have pooled more than 83 per cent of investments. The percentage is much lower for others.
Explanations range from some pools not being able to meet the investment needs of partner funds to a reluctance by local government pension committees to relinquish control. More often, says Jeegar Kakkad of the Tony Blair Institute, incentives are just lacking. His think-tank has proposed making pension-fund tax advantages dependent on consolidation.
Further restructuring will not be easy. The government was not prescriptive about how a pool should be structured. Assets have been pooled but pension schemes’ other functions, including administration or governance largely have not, says Steve Simkins of the consultancy Isio.
Bigger pots of money could benefit pension savers and encourage investment in illiquid assets — which can be higher risk, higher cost but potentially offer higher returns. So far, however, pooling has been disorderly. The government rightly has been squeamish about mandating where pensions money is invested. But clearer direction on consolidation is needed.
