It is no secret that Rachel Reeves is increasingly desperate. She’s desperate for economic growth. In fact, it is the only metric she will be judged on when her time occupying Number 11 comes to an end, whenever that is.
Rising GDP is also the target, alongside the length of the NHS waiting list, the Labour government will be measured against the next time Britain goes to the polls.
And Reeves is pulling all the levers she can to get the economy growing. Like the famous factory scene in Charlie Chaplin’s Modern Times, she is incessantly tweaking anything she can see with her spanner, hoping it works.
Unfortunately for the Chancellor, the resolution (or not) of Donald Trump’s tariff wars hold far more sway over the direction of the economy than almost anything she can do. But try she must.
Unlocking the trillions of pounds in the institutional pension sector was a priority for Jeremy Hunt, but now appears to be almost an evangelical task for Reeves. It is difficult to find anyone who doesn’t support the broad principle that Britain could massively benefit if only we could better harness the money saved, or “trapped”, in these gargantuan funds. Through demographic shift and the tightest of regulations, there is now a huge amount of money that is not helping the broader economy.
And defined benefit schemes are in historic good health. With gilt yields rising, the Pension Protection Fund estimates schemes are funded by more than 120pc.
You can bet the Treasury is keeping a close eye on the PPF index – and licking its lips.
But there are growing fears among some quarters of the pension industry that the Government could be on the verge of making a big mistake. Shortly it is expected the Treasury will formally respond to the Option for Defined Benefit Schemes consultation, launched by the Sunak government.
One suggestion discussed in the paper is to allow the sponsoring employers of defined benefit schemes to reclaim some of the surplus built up. There are better uses for surplus, which I’ll come to, but handing cash back to companies, no-strings-attached, is not the answer and risks all sorts of unintended consequences.
Supposedly, companies could use this cash to reinvest in themselves, in software, machinery and so on, to fuel that elusive growth. But they could just as easily end up using the money to offset their new rising National Insurance bills courtesy of Labour’s first Budget, which took effect at the start of the new tax year. This would be a poor exchange in a deal that sees members of DB schemes give up, in the Government’s own words, security.
Back in January, Reeves confirmed the response to the consultation will include a relaxation of rules around scheme surplus. It seems these rules, forged in the aftermath of the Robert Maxwell scandal, are one of the “biggest barriers to growth” that Reeves “wants to tear down”. It does alarm me slightly that the Chancellor is positioning these rule changes as “taking on the regulators” as if they weren’t directed by policymakers in the first place.
The Pension Insurance Corporation, the specialist pension insurer, has warned that ordinary members’ voices had so far been “entirely absent” from the debate. Others worry trustees are being sidelined.
If, as seems certain, surplus cash is allowed to flow back to employers, it surely needs to go into topping up the often pitiful defined contribution pensions offered to most private sector staff today.
This has been mentioned in official statements, but appears a secondary consideration behind giving cash back to chief executives to spend as they see fit. You can see why: employers are furious at the extra costs they have been forced to bear, just months after UK Plc largely lent its backing to Labour instead of the Tories. Reeves wants to throw them a bone.
In any case, if Reeves is successful in getting pension providers to commit to investing in the kinds of infrastructure assets she wants, the cash given to today’s workers will eventually end up in the same place anyway.
For too long, DC schemes have been ignored. DB funds won’t be around forever, and this could be the last chance to redress an intergenerational imbalance.
A survey of trustees conducted by LCP earlier this month found many trustees did not feel politicians were listening to them. The consultancy warned this was a “worrying omission”.
But if the protections around “surplus extraction” are made watertight, and trustees retain their power, this could be a reform we can all get behind.
