Well we got there in the end!
I first encountered the siren call for structural reform of the various Local Government Pension Schemes (LGPS) in a compelling paper written by Michael Johnson for the Centre for Policy Studies, the publisher of CapX, in 2014. And the opportunities which could be provided by consolidation (of both the LGPS and other pension schemes) were ones I pointed to in papers for the same organisation, looking at how to support high growth businesses and turbocharge levelling up policy.
Conservative ministers made it clear they wanted to shrink the number of schemes but it has fallen to Rachel Reeves and Pensions Minister Emma Reynolds to finally bring down the curtain. They should be applauded for doing so. Finally, after a series of missteps and backward steps, we are seeing something which might amount to the beginnings of a growth agenda from the Government (even more pressing after this morning’s quarterly growth figures).
Why does this pension reform matter? Principally because scale matters – and that is what these reforms will deliver. There have been some fairly heroic assumptions about how much money could be unlocked by these reforms, but it is abundantly clear that moving from 86 Local Government Pension Schemes to Reeves’ eight ‘megafunds’ will cut down bureaucracy and adviser fees – at least in the long term. And pensions, ultimately, are a long-term play.
But the wider opportunity here is around the shift in asset classes which these consolidated funds might invest in. As research from both New Financial and the Pensions Policy Institute has shown, UK pension funds (Defined Benefit (DB) and Defined Contribution (DC)) are disproportionately underweight when it comes to investing in productive assets compared to their international peers. That is a point which Reeves herself made in her Mansion House speech – pointing out that we can learn lessons from Canadian and Australian pension markets.
She’s absolutely right … but that is not to say that these megafunds will solve our problems overnight. In fact, it’s taken literally decades for the Canadian and Australian pension markets to reach their states of maturity and both have features which represent a marked difference to the UK system (and some pretty clear differences between them too, come to that.)
Chief amongst them is the fact they have a far more relaxed attitude towards paying top whack for talent within their pension funds. Will Reeves and Reynolds be intensely relaxed about pension fund managers, managing public money, getting filthy rich? One suspects not.
The Australian pension market success has also been built on the back of far higher pension contributions, now approaching 12%. One hopes and assume that’s a bridge too far even for a Chancellor who has made it clear she’s not afraid to whack business when it suits her.
The major question which hangs over these reforms, however, is which asset class is likely to benefit. That there is likely to be more money to invest is clear – but where will that money go?
Through the Mansion House compact a previous Chancellor (Jeremy Hunt) and a previous Lord Mayor (Sir Nicholas Lyons) aimed to channel more funding into unlisted equities. They convinced a number of the major pension providers to commit to 5% of their default pension funds going into that asset class by 2030. But the new Lord Mayor, Alastair King, recently and again last night made it clear that he wanted to see more money going into London-listed companies. Whereas the Government’s own press release talked about unlocking more money for infrastructure as well as for ‘local economies’.
Now there is a lot of money in UK pensions: £3 trillion in total according to the PPI report mentioned above, and £1.3tn due to be in the LGPS and DC market by 2030 according to the Treasury. Yet the amount of money is still finite. Five per cent here and five per cent there starts to add up. Moreover, there remains a fiduciary duty to maximise returns for pension holders. No future pensioner is going to thank a fund for investing in private markets, equities or even their local economy if they end up worse off as a result!
This is not a call for pension funds to continue to play it safe, preferring bonds and gilts to investing in the growth opportunities routinely favoured by the Canadians and the Australians. But it is a note of warning that any sort of binding mandate in terms of asset allocation, or even geographic allocation, would be unhelpful and unwise.
Could the reform have gone further? Undoubtedly. Why have eight megafunds when consolidating the LGPS into a single fund would have achieved real scale and created the fifth biggest pension fund in the world? Indeed, why not go further still and consolidate other public sector pension schemes into these same megafunds? Or why not really grasp the nettle and ask if public sector Defined Benefit schemes can really be justified in this day and age?
But this is not a time to be churlish. This was overdue reform and it is to be welcomed. Undoubtedly it will lead to more investment in the productive economy and that should both inspire growth and deliver better returns. Quite where those investments should be made, however… well, I think it’s best if we leave that to the experts.
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