Pensions revolution

Savers promised a better return on their money through government scheme to invest in major infrastructure projects Ministers believe it is a ‘win-win’ scenario, with economy benefiting from a funding boost as pensioners reap rewards

RADICAL pension reforms are being prepared by the Government to help millions of savers get better returns,

The Sunday Telegraph has learnt. Ministers across Whitehall are working on schemes to get pension funds investing in building projects ahead of the Chancellor’s Autumn Statement.

Energy projects such as nuclear power stations, railway schemes including HS2 and new broadband rollouts are most likely to benefit.

It is seen as a “win-win” because savers would get a good return on investments in difficult circumstances while funding a new infrastructure drive announced by Philip Hammond, the Chancellor. There are real concerns that pensioners have lost out in recent years as interest rates have slumped to 0.25 per cent, a record low. This week it emerged that 90,000 savers have stopped putting money into their pensions to avoid going over tax-free limits, which have been reduced.

A government source said: “If you’ve got a long-term infrastructure need why wouldn’t we be looking to put sensible money into that?

“Pension funds need to invest their money, they don’t want it sitting in cash or government bonds.

“If you can put it into something that can get them a decent return, that is far better.”

One idea being considered is to give regional mayors powers to create “city bonds”, raising up to £1 billion that would be underwritten by the Treasury. Another would see the Government actively encourage different pension funds to group together, amid fears that they are too small alone to interest project leaders.

Other areas of interest include getting the Treasury to take on the early risk of investing in building projects and extending a scheme that seeks funding for socially beneficial projects.

If successful, investments in infrastructure projects can often bring a yearly return that is 20 times what could be achieved through government bonds, according to experts.

Mr Hammond is understood to regard low returns for savers as one of his “biggest concerns”. Ministers have also identified investment in infrastructure as a way of giving the economy a boost ahead of an expected slowdown after the Brexit vote.

Cabinet ministers have privately admitted surprise at how much foreign funds such as Canada’s Ontario Teachers’ Pension Plan have invested in British building projects.

Ontario Teachers’ has billions of pounds in well-known projects including HS1 and Camelot, the UK National Lottery operator, as well as Birmingham, Bristol and London City airports.

British pension funds have been reluctant to invest in infrastructure projects because they are risky ventures in the early years, according to experts. However the rewards are considerable, with yearly returns of 10 per cent not uncommon. Senior figures in the Treasury and No10 are now examining whether those barriers to investment can be lowered as part of their aim to create an “economy for all”.

John Godfrey, No10’s new director of policy who worked at the financial services company Legal and General, is understood to be steering the project, but there is activity across Whitehall.

Damian Green, the Work and Pensions Secretary, will publish a Green Paper on defined benefit pensions as early as December that will touch on this policy. He is concerned that rules which cap pension funds from investing more than 5 per cent of their total

pot on a single project are inadvertently discouraging investment.

There is a hope that the Government can do more to group pension funds looking to invest together, making their offer more alluring to firms running bigger projects.

No 10 is looking at whether cities such as Manchester, Birmingham and Coventry can be allowed to raise their own bonds, with the proceeds spent on local infrastructure.

“There is very little ability for pensioners to have their money invested in their local economies. It is about creating new avenues of asset-based growth,” a source said.

The Treasury is also considering whether it can do more to take on the risk that big infrastructure projects have in their early years to help encourage investment.

Projects that provide a cash return – such as energy and utilities infrastructure – are believed to be favoured over those that do not, such as roads that do not charge users.

It is hoped the proposals can form part of Mr Hammond’s Autumn Statement on Nov 23, but the details are still being finalised and may not be ready in time.

Meanwhile, Karen Bradley, the Culture Secretary, is understood to be interested in extending the scheme of “social impact bonds”, designed to encourage funding in worthwhile causes.

One idea would involve pension funds being encouraged to invest in sports pitches, with a return paid out if there is a proven drop in local childhood obesity rates.

Two former pensions ministers praised the drive last night, saying it could be a “win-win” for elderly Britons whose savings have been hit in recent years.

Steve Webb, who served during the Coalition and is now a director at Royal London, said: “With interest rates at current levels, investing in infrastructure makes huge sense. If the Government can fill that void between pension funds and viable projects it would be a big step forward.”

Ros Altmann, who left as pensions minister in July, said: “I’m delighted the Government is taking this seriously because it could be win-win for the economy and pensions schemes.”