Reeves’s pension reforms are too little, too cautious and too slow

As a nation we need the government to succeed in lighting the fuse on UK growth. The consequences of failure are grave and, as Rachel Reeves noted in her Mansion House address this month, pensions have a key role to play. The changes the chancellor outlined are a good first step, and we should raise our ambition and recalibrate how we think as a country and as savers about risk and what we invest in.
The challenge is stark. Our pensions landscape is fragmented across defined benefit, defined contribution, local government, private sector and the pay-as-you-go state pension. We aren’t saving enough, and we exclude too many self-employed people, part-time workers and carers. On top of this, an ageing workforce combined with a declining birth rate is piling more pressure on the system.
The chancellor’s Mansion House speech addressed some of these issues but there is an opportunity to go further.
Consolidation and pooling of assets — proposed by the chancellor — are welcome measures to start with to fix these problems, but are only the first step. Big does not automatically equal better. But big does give the opportunity to invest in the people, governance, communication tools and quality research that increase the likelihood of savers getting access to and selecting superior investments. These could be in the UK or overseas, on listed markets or through private assets such as local housing, infrastructure projects, utilities, or innovative science and technology companies.
But if we really want to unlock further productive UK investment, we need to change how we perceive risk.
Risk is a subjective measure, but current UK regulation can incentivise those who are charged with overseeing pension assets to measure relative risk as volatility: how much an asset price moves up or down. Risk can, however, be as simple as losing money, or in the context of pensions, not having enough to retire on. If we take the latter view, then rather strangely, cash or government bonds become riskier than investing in long-term assets that can give inflation-beating returns.
Pension investors are rational allocators of capital. We therefore need to incentivise further to facilitate faster change. Other countries created incentives to hold domestic listed assets, for example, franking credits in Australia. This is why Australian pensioners support local companies, while in the UK, investors are penalised through stamp duty on UK-listed shares.
Savers also need to play their part here and be more proactive. Pension savings should not be seen as passive investments. Savers should challenge their advisers to ensure their assets are moved into those investments — such as renewable energy technology, and development projects — that carry higher returns in the long run.
As with any change, it’s going to take time for it to permeate through to saver behaviour and the wider economy. But there is one step the government could take to show it’s serious about promoting a greater focus on value that will create better returns for savers and support the UK economy.
This would be to utilise the more than £1 trillion of UK defined benefit pension scheme assets, also known as final salary schemes. These assets could be mobilised quickly with some swift changes that also protect members, in a similar way to rules implemented in Canada. Unlocking funding surpluses for the benefit of pension scheme members and UK companies would put real cash back into the economy now.
If these reforms are implemented correctly, we can start to drive the innovation and, yes, growth that could be unleashed from the provision of high-quality UK assets that incentivise pension funds to invest.
Some commentators say that pensions are broken. They are wrong. Pensions are a national success story with a history of innovation, but they are dated and require reform.
We need to bring true innovation back and banish the opaque practices of the past that rest on the premise that individuals are not equipped and too simple to know their own minds. Yes, they are complex, but we have to focus on empowering individuals, provide them with easy access to high-quality assets to improve returns and, in turn, secure retirement outcomes for the nation.
If we remove these shackles, then pensions can repay that vote of confidence, by driving the UK’s long-term ability to fund the health and social care system, housing, defence, research, and infrastructure, all of which ultimately benefits us.
Benoit Hudon is president and chief executive of Mercer UK, the financial adviser