ALEX BRUMMER: Fear of risky investments harms Britain

Updated: 06:05 EDT, 25 November 2023

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Unlocking Britain's pension funds for a revolution aimed at backing more risky investments, such as venture capital, tech start-ups and the lower reaches of the stock market, should have happened decades ago.

Brexit may have galvanised thinking in government, at the Treasury and in the City, but the horse bolted long ago.

It is shameful that UK retirement funds, once stalwarts of equity investing, pulled up the drawbridge and account for just 2 per cent of FTSE 350 shares.

Jeremy Hunt is determined to unlock some of the £1.28trillion of funds, held in defined contribution schemes (where returns rest on performance) for pioneering investments.

Backing Britain: Unlocking Britain's pension funds for a revolution aimed at backing more risky investments should have happened decades ago

Ideally, it would also be possible to tap into defined benefit schemes, where retirement payouts are effectively guaranteed. But that is far harder. Since 2001, when the Boots fund switched fully into gilts, there has been a stampede in the same direction.

The £4.8billion Boots scheme has just become the largest corporate plan to be freed from its ultimate corporate sponsor (American owner Walgreens) and bought-in by insurer Legal & General.

This year alone, L&G has added £13.4billion of pension transfers – both UK and overseas – to its books.

Such buy-ins move any risk from sponsoring companies to the insurer. Cutting loose the pension fund also removes a poison pill which may make it easier for Walgreens to dispose of Boots as it refocuses the enterprise on US healthcare services.

A series of moves by government and regulators hastened the decision of those who manage the assets of defined benefit schemes to switch from equities to bonds, ending a golden age for UK workplace retirement.

Labour's withdrawal of a tax break on the dividends paid into corporate pensions relegated many defined benefit schemes from surplus to deficit.

The trend was accelerated by tighter regulation and post financial crisis rules requiring all financial institutions to hold more bonds.

Ambition: Jeremy Hunt is determined to unlock some of the £1.28tr of funds, held in defined contribution schemes

In this week's far-reaching Autumn Statement, Hunt declared an ambition to release an extra £75billion a year for financing high growth companies by 2030. Getting there on a voluntary basis is a huge ask.

Among the first steps is to consolidate the tens of thousands of small defined contribution funds into an Australian-style, actively-managed superannuation fund.

Many employees in the UK barely realise that they have been automatically enrolled in pension plans and are clueless as to how pots are being managed.

Paradoxically, Labour, having defenestrated workplace pensions when last in office, now seeks new powers. Shadow chancellor Rachel Reeves wants the Pensions Regulator to help amalgamate defined contribution plans and direct investment into growth companies.

In the Autumn Statement, Hunt proposes a variation on the same approach. He suggested that resources held in the Pensions Protection Fund, the £40billion default rescuer for the schemes of insolvent enterprises, could be used to bolster adventurous investment along with merged local authority plans.

Both Hunt and now Reeves recognise the defensive approach to savings and investment by all parts of the vast UK pensions industry. But there are high hurdles to change. Encouraging consolidation is like herding cats.

There are big vested interests involved including the advisers, actuaries and fund managers who collect multiple fees from a divided client base.

One estimate suggests that bringing local authority plans together could release up to £1billion alone for backing Britain.

Then there are the layers of regulators. Freedom from Solvency II, the rule book imposed by Brussels, was meant to have been a golden bullet.

But last year's eruption in the market for liability driven investments (LDIs), derivatives built on gilt edged stock, frightened regulators to death.

The Bank of England, City enforcer the Financial Services Authority and the Pensions Regulator behave like nervous ninnies, afraid of the wrath which will befall them should something go wrong.

A succession of bad experiences dating back to Robert Maxwell and the looting of the Mirror Group pension fund has made them over-cautious and resistant to change.

Hunt and his successors have an enormous task to overcome a cultural aversion to risk. Lessons must be learned from the US where a red-in-tooth-and-claw capitalism thrives on risk and the possibility of out-sized returns.