Britain sitting on £4.6trillion to boost economy and improve pension returns

Changing Britain’s pensions system could provide vital funding for the British economy to provide better returns for pensioners and help the technology companies, two industry experts have claimed.

After the death of newspaper mogul Robert Maxwell, there was a massive increase in red tape in the retirement industry during the 1990s. This was pushed by the discovery that £460million had been fraudulently appropriated from the Mirror Group’s pension fund to prop up Mr Maxwell’s debt-laden companies.

The actions discovered meant the end of an era for UK pensions as funds became more risk-averse and there was less exposure to the stock market and early-stage companies.

But Nausicaa Delfas, the new head of TPR, Britain’s workplace pensions regulator, told Professional Pensions Live: “I am making a call for action — we need to work together to make the system the best it can be for savers. We need to do this so that pensions deliver a pot that enables savers to have confidence, empowerment and security in later life.

We need to do this to support savers when they come to use their money. And we need to do this to make the process of decumulation clearer and more accessible, and to ensure we protect savers from scams, poor advice, and lost value.”

She urged the industry to “change its mindset,” from prioritising low costs to putting value first.

‌This red tape controls every aspect of how a saver’s money is invested, from strict accounting regulations to limits on the kinds of assets that can be held. It has led to much more control in terms of what pension funds could invest in

However, experts argue that reform could create billions of pounds of capital to help the British economy recover after the pandemic.

Michael Eakins, chief investment officer at FTSE 100 pensions business Phoenix Group, explained that getting rid of the strict rules will create an environment where new companies can be “founded in the UK, developed in the UK and listed in the UK”, boosting the economy and creating jobs in the process.

Mr Eakins said: “Over the last two to three decades, there has been a consistent and persistent de-equitisation of UK pension funds and insurers and it absolutely is a concern. That concern is manifesting itself in terms of the impact on the UK economy and the standing of the UK economy as a place where companies want to come, start themselves up and evolve.”

Nigel Wilson, chief executive of Legal & General (L&G), the UK’s biggest pensions manager, blamed the de-equitisation drive on new accounting rules introduced in the wake of Maxwell’s death and Gordon Brown’s decision to charge higher taxes on dividends.

The Telegraph reported that Mr Eakins and Mr Wilson are calling for a cultural shift to embrace greater risk in the UK pensions industry to create more for the economy.

The New Financial report shows that UK pension funds have quadrupled their allocation to bonds to 56 percent over the last 25 years.

The uptake of bonds signalled a new era of “liability-driven” investing (LDI), which was regarded as a safe and fool-proof strategy until Kwasi Kwarteng’s mini-Budget last year caused debt prices to plummet, leaving some retirement schemes about to collapse.

However, Hendrik du Toit, chief executive of FTSE 250 believes this is now time for them to take higher risks.

He explained how Canadian and Australian funds have been given more freedom by their home regulators to invest in higher-risk asset classes such as listed and early-stage companies, venture capital and private equity, and the results have, on the whole, been positive.

Despite speculation as to the benefits of having less regulation when it comes to the UK pension system, the Chancellor, Jeremy Hunt has not decided if he should tell fund managers where they should invest some of their capital.

Morten Nilsson, chief executive of the BT Pension Scheme (BTPS) said: “Pension schemes need to be able to have the freedom to invest in the very best way to meet the needs of scheme members. Trustees have a duty to members and need to select the most appropriate investments regardless of geography.”

In Autumn, Hunt will make a speech on pension reforms likely to include plans to consolidate the fragmented industry, bringing it more in line with the likes of Canada.

Wilson concluded that Britain needs to be more ambitious and set its sights higher than being more attractive than the European Union. The UK missed the technology bubble in 2000 when a lot of the companies of today were formed and scaled up.

‌He explained that America has ended up with a huge amount of scaled-up businesses and the UK hasn’t had any.

He said: “Being better than Europe should not be the benchmark. There isn’t a European capital market equivalent to New York or London or Hong Kong, so we’ve got to make [the system] function much better.

“We have to compete on a global level and the UK and London are falling behind.”