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If Reeves wants to risk our pensions, she should start with her own

If Reeves wants to risk our pensions, she should start with her own

Telegrapha day ago
When does the Pensions Regulator cross the line between acceptable cheerleading for government policy, and setting up a potential conflict with its fundamental duty to protect workplace pensions?
Last week, one of the directors of the Pensions Regulator – who recently joined after 25 years as a fund manager – made a tub-thumping speech, which, I believe, crosses this line.
He said: 'As regulator, we are embracing a new regulatory philosophy. One that sees growth and saver outcomes not as competing priorities, but as mutually reinforcing goals… We are actively encouraging schemes to adopt long-term investment strategies that support both member outcomes and national growth.'
What does this mean in practice?
The Government has set out its plans to consolidate assets in both the public sector local government pension scheme, and in private sector defined contribution workplace pensions.
Local government pensions are, of course, defined benefit, guaranteed by taxpayers and don't depend on investment performance. But the value of defined contribution pensions, with no guarantees, depends entirely on investment performance.
Rachel Reeves has left no doubt that she wants to get more of our pension savings into UK 'private assets' – venture capital and infrastructure – to supercharge the UK's lacklustre investment and to power economic growth.
As part of all this, the Government has just published a lengthy Pension Schemes Bill with 12 different policies – a hotchpotch of the good, the bad and the indifferent.
Last month, the Chancellor also strong-armed 17 of the largest pension providers into extending the existing voluntary code for defined contribution pensions – The Mansion House Accord – and commit to investing 10pc of pension savings in private assets by 2030, with half in the UK, amounting to a possible £50bn. Of all the pension providers, Scottish Widows (part of Lloyds Bank) chose not to sign.
The Government has included 'reserve' powers in the Pensions Bill which could compel pension providers, and therefore pension savers, to put 10pc in private assets, whether they want to or not.
This 'reserve' power looks like muscle flexing from a government weakened by about-turns on winter fuel payments and welfare benefits. Why choose to spend limited political capital threatening to introduce any form of pension compulsion? In any case, how would this fit in with the fiduciary duties of pension trustees to act in the 'best interests' of their members?
Rather than 'soft' or 'hard' compulsion, pension providers should offer the choice of holding private assets, and then, along with the Government, put the positive case to pension savers.
Investing in private assets is supposed to generate higher pensions, but detailed analysis by the Government Actuary's Department published last year (see page 26), shows this is just wishful thinking.
The analysis models the likely returns if 15pc of defined contribution pension assets are switched from US and international equities (now 70pc of assets) to infrastructure and private equity.
After 30 years of regular pension saving, the supercharged private portfolio is expected to outperform the current portfolio by 2pc. That's not an annual figure, it's 2pc in total after 30 years – less than a tenth of 1pc a year, basically a rounding error.
The real difference with private assets is not performance, it is fees, which the Government Actuary assumes will be a whopping 1pc a year, plus a 10pc performance fee, versus just 0.25pc a year on other assets.
Private assets are notoriously difficult to value, and are much harder to sell than public assets, a problem many private equity funds are now seeing. Returns in recent years have also been boosted by ultra-low interest rates – let's see how private equity copes with much higher borrowing costs.
If the investment case really is so strong, then shouldn't the Government be prepared to guarantee pension savers a minimum return on any UK private assets they are obliged to hold?
All MPs, including Ms Reeves, enjoy a very generous defined benefit pension, guaranteed by taxpayers, regardless of asset performance. Again, if the investment case is so strong, then shouldn't she and all the Cabinet set a good example by moving their own pension to a defined contribution plan, largely invested in private assets?
Pension investment for people on modest earnings should be laser-focused on low costs, low risk and simplicity, which means passively managed public assets, not private assets with high costs, high risk and complexity.
Sadly, the new Pensions Schemes Bill, and now apparently the Pensions Regulator, ignores this.
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