The Chancellor’s radical plan to create pension “megafunds” could see pensioners’ savings invested in riskier assets, potentially resulting in losses.
The damning assessment comes after Rachel Reeves announced that she was planning on consolidating local government pension schemes and defined contribution (DC) schemes into larger, more efficient investment pools.
Announcing her bold reform in a speech in the City of London in November, Reeves said it could unlock around £80billion for investment in new businesses and critical infrastructure.
This is expected to drive economic growth by enabling more significant investments in higher-risk, higher-reward assets like private equity and infrastructure projects
Does she have a point?
Larger funds can invest in a broader range of assets, potentially leading to better returns due to reduced management fees and increased bargaining power.
The government cites the success stories of Canada and Australia, where larger funds have shown the ability to invest more effectively in long-term assets.
Larger funds also benefit from economies of scale, covering the costs of expensive internal specialists, which is particularly crucial for managing unlisted assets such as private equity, venture capital, or infrastructure.
Reeves plans to merge the UK’s 86 council pension schemes to achieve this scale.
The Chancellor reckons it could unlock around £80billion for investment in new businesses and critical infrastructure
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Rewards do not come without risk
A key danger is that the government’s goals for economic growth might not align with those of individual savers.
For example, a report from the Pensions Policy Institute (PPI) – an independent research organization that studies the UK pension system – concluded: “There is a risk that policymakers might prioritise national economic objectives over the primary goal of pensions, which is to provide secure retirement income for individuals.”
Economists have underlined these concerns, warning that the push for investment in riskier assets might not align with individual savers’ risk profiles.
Simon French, chief economist at Panmure Gordon, was quoted in The Financial Times as saying: “The push towards riskier assets might be misaligned with the risk tolerance of the average pension saver, particularly those nearing retirement who might prefer less volatility in their investments.”
This is echoed by Tom Selby, director of public policy at investment platform AJ Bell, who recently said: “Conflating a government goal of driving investment in the UK and people’s retirement outcomes brings a danger because the risks are all taken with members’ money.’
He added: “There needs to be some caution in this push to use other people’s money to drive economic growth. It needs to be made very clear to members what is happening with their money.”
Tom McPhail, director of public affairs at consultancy the Lang Cat, also points out that with megafunds, individual control over investment choices diminishes.
He said: “I’d urge caution here with the leap of faith that the government is making. Is it safe to assume that all schemes will want to invest in the opportunities they’ve outlined?”
Economists warn that the push for investment in riskier assets might not align with individual savers’ risk profiles
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Economists such as Torsten Bell of the Resolution Foundation warn that investing in riskier assets could mean that in pursuit of higher potential returns, savers might end up facing losses, especially if the economic cycle turns or if these investments don’t pan out as hoped.
The Government insists that by incorporating higher-risk investments into portfolios, there can be improved returns for savers”.
This assertion generally holds true, as a basic tenet of investment theory suggests that higher-risk investments must provide higher returns to lure investors.
Nonetheless, research indicates that the additional yield from such illiquid assets might only be around one per cent annually over an extended period.
