Our pensions are broken. It’s time for trailblazing funds that will make us all richer
THE UK’s pension savings system is broken and long overdue for sweeping change. That’s how a report published last week began and which highlights how the UK has been so badly let down by a deeply flawed pension savings system. It’s one that has left the present generation short- changed and will see our grandchildren even worse off.
There is a solution, which if implemented, would be a crucial first step in reviving our ability to tap into, and scale up the UK’s unrivalled creativity and entrepreneurial spirit.
We write this as two Canadians who have lived for many years in this country and watched with dismay as the UK’s dynamism has been dissipated by the almost total absence of what is normally plentiful — financial capital.
Over the past two decades, the UK’s reservoir of domestic equity to fund long-term growth and innovation has been remorselessly and needlessly drained — and is now almost empty.
The report’s core recommendation entails rolling up the smallest 4,500 defined benefit pension funds (average size around £100 million) into an established and successful institution, the Pension Protection Fund (PPF). This would become the first of several GB Superfunds: GB Savings One.
With around £400 billion under management, it would take its immediate place amongst the world’s professionally managed large scale pension funds.
More importantly, it would give UK pensioners dependent on the thousands of small, high cost and fragmented funds, the three crucial ingredients needed to underpin competitive returns. These ingredients would ensure their funds’ long-term security and stability — scale, diversification and best in class management.
A GB Superfund would also blaze a trail for other savings systems, including the local authorities, defined contribution payroll plans and, ultimately, for public sector pensions, which are currently completely unfunded.
The report recommends releasing hundreds of billions of pounds currently invested in low-return, but clearly not low-risk, bonds for productive redeployment.
This would include investing into listed UK companies that have for so long been starved of long-term growth capital. In turn, they could look to increase investment in growth and competitiveness.
The report also makes it a requirement that, to maintain pension funds’ tax privileged status, at least 25 pc of their assets would need to be invested in UK companies, a condition that would not be permitted under EU law and is therefore a new freedom arising from Brexit.
A GB Superfund would help keep at least some of the enormous value created by the UK’s largely taxpayer- funded unrivalled university research engines. The next ARM holdings ( a home grown Cambridge microchip supplier) or Immunocore (an Oxford originated biotech company) can remain in the UK rather than have no choice but to turn to American investors and the NASDAQ stock exchange for long-term capital to fund their development.
Pension security could improve for the current and next generations. Members of existing small, high- cost funds may be under the illusion they can rely for pension security on their companies in all circumstances. however, many of the companies which provide ‘guarantees’ are, in fact, much smaller than the pension funds themselves.
Consolidation of these funds into the PPF will provide pensioners with the benefits of scale, diversification and skilled management to generate better returns — from an average of just 6 pc from when they were attached to their corporate sponsors to average returns of almost 9 pc.
A GB Superfund would protect and reinforce national security by
A Superfund would blaze a trail for other savings systems
The time for profound and lasting action is now
reducing dependence on overseas capital for our most critical infrastructure. Take, for example, high- speed rail, toll roads and renewable energy (including wind farms and solar power), life sciences, cyber- security and AI, plus much of our military industrial supply chain.
We do not need to invent a new institution or to prescribe specific pension fund asset allocation mandates, which has a sorry history in this country and abroad.
The PPF offers an established model for sweeping consolidation of a highly fragmented and precarious system. It also shows that we already have the capability to manage large- scale funds, including how to strike a dynamic balance between risk and longterm returns.
There is no capitalism without capital and this country deserves a better, more stable and more enduring system that can do justice to the UK’s talent and entrepreneurial drive. The time for profound and lasting action is now.