Rachel Reeves's pension gamble is pointless. Even her own advisers say so

Telegraph

13-05-2025

Rachel Reeves is determined to get more of our pension savings into UK private assets with the aim of boosting the UK's lacklustre investment.
Part of her plan is to merge pension funds to increase their economies of scale and give them more firepower. This 'bulking-up' applies both to the £400bn defined benefit scheme for local government staff in England and Wales and to defined contribution (DC) workplace pensions for private sector employees.
But the Chancellor also wants to extend the current voluntary code for DC pensions – The Mansion House Accord – and get the biggest pension companies to commit to put 10pc of pension savings in unlisted assets by 2030, with half in the UK, amounting to a possible £50bn.
It's easy to see what the Chancellor gets out of this. Less government borrowing, and, of course, it's also more business for the small UK-focused City firms – which have lobbied hard. But what about pension savers? Can they expect higher returns from investing in the UK or is it just a patriotic glow, like buying War Bonds?
Unfortunately for the Chancellor, the detailed analysis from the Government Actuary's Department published to support her Mansion House Speech last year is not a ringing endorsement.
It concludes that the likely risk-adjusted returns for DC savers if they switch from holding international equities – especially US – to UK equities and private assets, are virtually the same. Any differences over 30 years of regular savings are just lost in the rounding.
Since likely returns are identical, DC savers should make their investment decisions on second-order grounds of maximising international diversification and minimising cost.
UK equities represent just 4pc of the MSCI World Index, with the US – dominated by big tech companies – making up a huge 70pc. But the UK equity allocation for DC pensions is 8pc, already double the 'neutral' weighting.
There are good reasons for UK investors to 'overweight' the UK – lower management charges and costs, no need to hedge currencies back into sterling, and many UK companies operate overseas, providing plenty of international diversification.
What about costs for UK private assets? Fees are much higher than on public, passive equity trackers. Adding insult to injury, performance fees, paid on top of annual fees, are excluded from the 0.75pc pension auto-enrolment fee cap. Private asset valuations are also opaque, and they are much harder to sell, when you need to, than public assets with a clear quoted price.
The Chancellor could always tip the scales, and make UK equities more attractive by reinstating the dividend tax credit abolished for defined benefit pension schemes in 1997 by an earlier Labour chancellor, Gordon Brown.
The reason Australian savers hold Australian equities – which the Chancellor praises as a model for the UK – is the dividend tax credit. Of course, a UK dividend tax credit would be expensive, and surely it is better to give tax breaks directly to companies investing in their businesses?
It is also not clear from the public and private briefings of the past few months if the Government has dropped the idea of forcing pension savers to hold more in UK assets – which was originally floated in a big way by Emma Reynolds, the previous Labour pensions minister.
How would compulsion work in practice? Just passing a law to make it so is never easy, and takes up a lot of parliamentary time and energy – as well as using Labour's political capital. And how could this new law fit with the wide-ranging fiduciary duties of pension trustees to act in the best interests of their members?
If the Government really is confident that UK private assets will benefit pension savers by generating higher long-term returns than international public assets, then it should be prepared to offer savers a minimum return on any UK private assets they are compelled to hold.
Let's be absolutely clear. Pensions assets belong to the individual savers, not to the Government. And compulsion is a bad idea, both philosophically and also because it could undermine confidence in pension saving – fragile at the best of times.
Over the years various overseas governments have tried to dictate how pensions should invest, none have worked out well. Reeves should rule out this idea.