The chancellor’s plan to enable UK pension schemes to invest in a broader range of assets is aimed at both boosting the investment returns available to pensioners and driving capital into early-stage and unlisted companies, but there are “no guarantees” those aims will be achieved, according to a range of industry experts.
Chancellor Jeremy Hunt announced in his annual Mansion House speech that nine pension providers have signed up to a voluntary “compact”, whereby they agree to have a 5 per cent allocation to those assets as the default. That could equate to around £75bn of assets.
The assets include both unlisted early-stage companies and private equity-type strategies.
But while he broadly welcomes the initiative, AJ Bell head of retirement policy Tom Selby says: “The chancellor is clearly desperate to boost long-term growth in the UK but has no appetite to do so through increased government borrowing. Given that context, it is understandable Jeremy Hunt has his eyes firmly set on directing a chunk of the UK’s £2.5tn pensions war chest into the UK economy.
‘Handful of salt’
Hunt said the reforms will also boost the returns of individuals in defined benefit pension schemes by 12 per cent over their lifetimes, and provide £1,000 of extra income in retirement, on the basis that the returns from these assets should be higher than the alternatives.
That figure is based on an individual beginning to save into a pension at the age of 18, and continuing to contribute until retirement without a break.
Selby says that while the returns may be higher, “there are absolutely no guarantees”, and that such precise figures should be taken with a “handful of salt”.
Sir Vince Cable, the former secretary of state for business and current holder of economics posts at the London School of Economics and the University of Nottingham, says he is “surprised this hasn’t been announced sooner. It’s important that the savers understand the extra risk they are exposed to”.
He continues: “But I would also say that, based on my experience in government when we launched a couple of initiatives such as the British Growth fund and the British Business Bank to raise capital for early-stage businesses, it takes years to gain any traction.
“Indeed, those institutions still don’t really manage very large sums today. So I don’t think this will make much difference in the next year or two, but I welcome any initiative which helps deepen the pools of capital available in the UK.
“It has always struck me as odd that many of the Canadian, American and Australian pension funds actually own these type of assets in the UK, but UK pension funds are not permitted to.”
Both Selby and Cable also say they welcome the fact that this initiative is voluntary, and so pension providers will never be forced by the government to allocate capital this way.
