Chances are, your pension won’t be enough to live off.
This isn’t just a personal crisis, it’s a national one. Because the Government now wants pensions to more than fund retirement. It wants them to help rebuild Britain.
Over half of savers will fall short of the 2005 Pensions Commission’s retirement income targets. Worse yet, 45 percent of working age adults are saving nothing at all. That’s the uncomfortable truth behind the Government’s decision to revive the pension commission.
But Britain has another problem: underinvestment. And these two problems are deeply connected.
The same pension system that’s falling short for individuals is also failing to support national investment.
Since 2000, UK pension funds have slashed their domestic equity holdings from 53 percent to just 4.4 percent. Meanwhile, the UK has consistently fallen behind its G7 and OECD peers in infrastructure spending, by around five percent of GDP since 2008.
To solve both problems, the Government wants UK pension funds to help bridge the infrastructure gap by investing in domestic productive assets. In May, 17 workplace schemes—covering 90 percent of the market—agreed under the Mansion House Compact to invest 10 percent of DC default funds in private markets by 2030.
The stated goal is simple: “higher returns for savers and higher investment for Britain.”
But it’s that second goal, and how they’re pursuing it, that’s proving controversial.
Noticeably, one key voice is missing from this debate— savers. Only 26 percent of pension savers actually know what their pension is invested in.
Despite the stakes, most are disengaged or unaware. So any solution must not only deliver higher returns for savers, but earn public trust.
Embedded within the Pension Schemes Bill is a reserve power allowing the Government to mandate how pension funds allocate their assets to enforce the compact.
Pensions Minister Torsten Bell, says the powers are a “backstop”, not an edict. He’s been keen to stress that “it is the industry that has set themselves the benchmark” — and that the Government has no plans to use it (unless the industry fails to follow through).
Opposition to this has ranged from concerns over whether pension funds could fulfil their fiduciary duties when faced with the competing priorities of maximising returns and backing infrastructure projects, to outrage over the Government exercising any authority over how funds allocate their assets.
The most prominent criticism is that, rather than using pension funds to prop up UK markets, the Government should focus on making its markets more attractive to global capital.
Yet, in the midst of this very predictable debate, Baroness Altmann, former Pensions Minister, has argued for a more creative solution based on reciprocal public benefit.
Altmann argues that since pension schemes receive generous tax relief, around 25 percent on contributions and withdrawals, costing the state over £70bn a year, they should invest at least 25 percent of each new contribution into UK markets. For her, this “quid pro quo” is a fair return for the public good.
If pension funds receive the public’s money, why shouldn’t they support its interest?
Her plan, she argues, represents “incentivisation rather than mandation”: fund managers unwilling to invest domestically could simply forgo the relief.
For Altmann, this would shift the risk-return calculation for pension funds, allaying concerns of fiduciary duties, and “help drive a re-rating of all UK assets”, creating a virtuous cycle of better performance and higher growth.
The incentives argument is distinct from the “backstop” power to mandate asset allocation. Incentives nudge; reserve powers compel. One’s a carrot, the other the stick. That is a distinction worth noting.
Whatever the merits of Baroness Altmann’s argument — whether you passionately agree or disapprove, the state provides significant tax relief to these funds. It is therefore entirely appropriate for the state to consider whether these incentives are delivering for savers and growth.
If they don’t, why shouldn’t they change them?
Especially if our pension capital can help a problem as well documented as the UK’s infrastructure gap and stagnating growth. Then, in Baroness Altmann’s words, this would be a “win-win”.
Yet, the concern that the Government shouldn’t solely prop up the UK market using pension capital is a powerful one.
Of course, if any proposed set of solutions do not address the underlying problems with our capital markets and regulatory regime — what’s the point of leveraging our pensions?
Over the coming months, the Government will be looking at this question. So far, the focus has been auto-enrolment rates. But the IFS warns that raising contribution rates could cause “greater hardship today,” especially for low-income families.
So, if the Government can boost returns and growth without mandating asset allocation or significantly raising contribution rates — will it change course? Doing so could avoid a deeper clash over mandation, keep the industry on side, and help people avoid the burden of higher contribution rates.
To deliver for savers and the economy, the rules may need to be rethought. Because in their current form, pensions aren’t working. Not for savers. And not for Britain.
Image source: Flickr/HM Treasury