Poor Jeremy Hunt. He really can’t find many people in the pensions industry who think his big idea – to push pension funds into investing in fast-growing British companies – is a good one. And I’m afraid he won’t find any support from me, either.
The key plank of the Chancellor’s Mansion House Reforms is the commitment from nine of the country’s biggest defined contribution providers to have at least 5pc of default funds invested in unlisted (private) equity by 2030.
Private sector defined benefit schemes will not be involved – quite right too given how mature their memberships are – but local government funds have also agreed (read: been told) to join the party.
Mr Hunt is clear about what he, or rather start-ups and private equity fund managers get: a gigantic wall of cash, £75bn he reckons, to grow the economy. But savers will have “tangible benefits” too.
A typical pension saver’s pot will be 12pc bigger as a result, equating to more than £1,000 a year in extra retirement income, the Chancellor promised.
The usual beard stroking comparisons with Australia’s gold-standard superannuation schemes and their higher allocation to unlisted firms and superior returns have been made. They are right to look to Australia, and other places, for tips on how to boost returns. Lord knows the millions of average earners relying on auto-enrolment minimum contributions to fund their retirement need some sort of miracle.
Peter Harrison, chief executive of Schroders, the giant fund manager, and Sir Jonathan Symonds, chair of drugs maker GSK, wrote a glowing review of the reforms in the Daily Telegraph. That they welcomed Mr Hunt’s plans is hardly surprising, they are both members of the UK Capital Markets Industry Taskforce, a group tasked with strengthening the City of London’s position as a centre of corporate investment.
While they seem pleased overall, the column does reveal a reluctance to punch the air too hard in triumph. They admit that the policy changes “that taken altogether would change the bigger picture won’t be in everyone’s favour”. They also point out that comparisons with other countries are “tricky” and that the likeliest cause for flagging returns in Britain is the “lack of exposure to growth assets, including unlisted or private market investments”.
And there’s the rub. Private investments can certainly be seen as growth assets, but are they the right growth assets for our pensions? Yes, our pension fund strategies are generally too cautious. Indeed, Nest deliberately designed its funds for the very youngest savers to be primarily concerned with not losing money (so as not to encourage “opt-outs”), rather than growing as fast as possible – precisely the opposite of what every financial adviser in the country would recommend. But the answer should, at least in the first instance, be increasing the exposure to companies listed on stock exchange and all the oversight that entails.
And I suspect the trustees running the big master trusts that make up the bulk of auto-enrolment schemes will think the same. The providers may well be on board with the Chancellor’s big idea, but it is the trustees who need to be convinced that it is in the best interests of their members. As I’ve written before, I was briefly a trustee – and I would certainly not be rubber stamping a 5pc allocation to companies that are largely invisible to stock market analysts. That was Neil Woodford’s undoing, after all.
Baffling, the Government itself seems to agree. Internal modelling published alongside the reforms shows that the very high fees charged by private equity firms could erase returns for pension savers.
Government analysis estimates that in the average scenario, before fees, a worker earning £30,000 and saving into a pension for 30 years would have a pot worth £283,800 if 5pc of the money were invested in private equity.
If it were only invested in stocks and bonds, it would be worth £273,300, Department for Work and Pensions analysis showed. However – after fees – a saver who did not invest in private equity would be £1,300 better off, the DWP said.
The Government has suggested those high fees may be squeezed down, but they are still likely to be higher than the 0.75pc or 0.5pc management charges most members pay.
Mr Hunt is absolutely right to be trying to supercharge growth in both British companies and the pots of British savers. I’m less qualified to speak on the former, but for pension savers the best advice I can give is to make an active decision about your investments. The likelihood is that you are not taking enough risk, whether you are young or even at retirement age. Only last week I got a letter from a furious reader who discovered his provider had systematically put his money into government bonds just when the gilt markets went into meltdown. It cost him 20pc of his pot, at exactly the wrong moment.
And thank god for trustees and their duty to members, not Jeremy Hunt.
