Rachel Reeves’ growth-at-all-costs juggernaut rumbles on and now it’s the turn of the Pensions Regulator to jump – or rather, be forced – onto the bandwagon.
In a speech called “Pension regulation and growth: a new era for savers and the UK economy”, Julian Lyne, a director at TPR, said the regulator was “embracing a new philosophy”.
He said this new approach was one that “sees growth and saver outcomes not as competing priorities, but as mutually reinforcing goals…. We are actively encouraging schemes to adopt long-term investment strategies
that support both member outcomes and national growth.”
Now, this change of direction is highly significant. The whole point of a regulator is to protect individuals who lack the power to do it themselves and to ensure the smooth operation of the wider market for the good of its participants.
There is inevitably going to be conflicts if TPR is going to be working in the best interest of pension scheme members and national growth. The focus for decades has been about controlling costs and regulators have been very successful at forcing down charges since automatic-enrolment launched.
If I was a trustee (and I was once before we got swallowed up by a master trust) I would need some persuading to suddenly tilt towards so-called “productive” assets like infrastructure and privately-owned companies. Funding a new motorway might be great news for the East Midlands, but that doesn’t make it a good place for my retirement savings.
Steve Delo, partner and chair of PAN Trustees, speaks for most trustees I suspect when he told me that politicians needed to remember that “this is not their money”.
He said: “Pension schemes are complex systems and we’ve had many pensions problems over the years because governments haven’t thought things through – their decisions then have unintended consequences.”
It will be sensible views like this that has led to the Government to add “reserve powers” in its recently published Pension Schemes Bill. This means regulators would be able to force defined contribution schemes to invest in the kind of assets the government, any government, would like. Reeves should tread very carefully.
Compelling pension funds to invest in private assets when there are better alternatives is not any way to regulate. As Delo says, “you certainly can’t just conjure up appropriate investments and I’m yet to see one.”
Trustees and the independent governance committees mandated by the Financial Conduct Authority, should not and will not just roll over and do what Reeves wants.
Hilariously, the Government’s own research on the potential performance of private markets suggests the risks are barely worth the payoff. A Department for Work and Pensions paper published in November found that “on a risk-adjusted basis, returns are similar with greater allocation to private markets”.
It said pension pots might end up being 2 per cent – yes, as much as 2 per cent! – bigger if they had an allocation to private equity. Clearly, no-one can predict what will happen in public and private markets over the next 30 years, but with the evidence we have at the moment you’d be mad to go along with the Government’s plan.
The proof is in the pudding. If these investments (and I’m still unclear exactly what they are) are so brilliant for everyone, then the Government needs to prove it.
Here’s an idea, why doesn’t Reeves compel public sector schemes, at least the ones that actually have a fund rather than being paid out of tax revenue, to invest the way she wants and then we can all see what a great idea they are and follow suit.
Unlike private sector defined benefit funds, where trustees are desperately trying to insure away all their risks, these schemes are generally immature and can afford to invest for the long term.
Perhaps the MPs’ pension scheme, which of course we all pay for, could start. Dame Meg Hillier, a Labour MP, is on the trustee board and chairs the Treasury select committee – I wonder how she would feel about having her retirement savings in an illiquid, impossible to value infrastructure project.
Everyone wants the British economy to boom with super-duper new infrastructure but these are our private savings. No-one is going to step in and help us when, at 60 or 70, we come look in the biscuit barrel and it’s bare. Long may trustees, the guardians of our life savings, put individuals ahead of a political agenda.
