There are two ways in which UK pensions and the UK economy are interdependent. There is an inverse connection between rates of pension saving and consumer spending, while there is a positive link between earned income and retirement income.
Tens of billions of pounds are taken out of working people’s wages each year and invested on their behalf in workplace pensions. That’s money which isn’t being spent today, neither creating jobs nor contributing to company profits today.
The biggest single determinant of someone’s income in retirement is the amount of money that has been put into their pension pot during their working life. To accumulate a sufficient pot, you need to have been in employment for most of this time, enjoyed a comfortable salary and worked for an employer making pension contributions substantially more generous than the 3 per cent of salary currently required.
With estimates putting pension assets in the UK in the region of £3 trillion, it’s therefore not surprising that economists and politicians are starting to more formally consider how UK pension assets could help the UK economy recover post-pandemic and restructure post Brexit.
At a macro level, it may sense for UK pension assets to play a greater role in driving the UK economy, creating jobs and successful businesses. However, at a more micro level, the custodians of pensions assets – trustees and product providers – are required to prioritise the outcomes of their own scheme members – whether through fiduciary duty or competitive pressure. To balance that, this Government could mandate that a proportion of scheme assets are invested in stipulated ways, but that has been ruled out for the time being.
This then takes us to the Productive Finance Initiative, a joint venture between The Bank of England, HM Treasury and the Financial Conduct Authority. The initiative is progressing the creation of a new investment vehicle, a Long-Term Assets Fund (LTAF). The new fund must invest predominantly in illiquid investments, and there is the prospect of some gearing through an ability to borrow to an amount equal to 30 per cent of the fund’s assets.
Some asset managers can see potential opportunity in making greater use of illiquid investments such as unlisted securities and infrastructure. That might mean that we see LTAFs find their way into the defaults of large pension schemes to some extent, at some point in the future. However, given the required focus of custodians on the micro rather than the macro, it’s likely that the majority of UK pension money invested through LTAFs will be chasing the best risk adjusted returns around the world. This would support the recovery and restructuring of other people’s economies rather than the UK’s.
The other strand of Government policy which is currently visible is the 2021 reboot of the 1980s ‘Buy British’ campaign, with the Chancellor and Prime Minister writing to major providers and schemes asking them to steer scheme members assets towards UK investment opportunities. Unlike ‘green’ investing – where the consensus attributes a strong positive correlation to the relationship between saving the planet and investment returns – there’s no such proven correlation between saving the UK and investment returns.
To square this disconnect between the micro and the macro, the Government needs to find a way of presenting long-term opportunities to invest in the UK, as offering a better risk adjusted return than international alternatives.
There are ways to do this, for example to influence the relative level of return, tax incentives could apply (or be restricted to) investments in the UK. Or, to influence the relative level of risk, a suite of investments of national importance could be packaged with a form of HM Treasury underpin.
Simply flying the flag didn’t persuade my dad to buy a British Leyland back in the 80s, and I don’t see anything similar having a greater influence on today’s custodians of pension assets. Don’t get me wrong, new facilities which allow more flexibility to include more illiquid assets in DC pensions would be a good thing and create value for scheme members at the micro level. Just now, potential additional benefits generated at the macro level will be negated by a policy jigsaw where some important pieces are still missing.
