Savers could see their pension pots boosted by an average of £1,000 a year as providers pile billions of pounds more into fast-growing British start-ups.
In the largest overhaul of the pensions market for more than a decade, Jeremy Hunt has agreed with the UK’s leading pension providers committing them to investing significantly more in high-growth domestic firms.
The chancellor unveiled an agreement His so-called Mansion House Reforms will unlock £75bn of investment from pension schemes to be funnelled into British firms, according to Treasury estimates.
And while critics say the reforms will see pension funds taking on more risky investments, Mr Hunt’s plan will see the average saver rewarded with greater returns on their pension pot.
An average saver will see their pension boosted by by 12 per cent over the course of their career, or as much as £16,000, Mr Hunt said.
The reforms, the biggest shakeup since the rollout of auto-enrolment in 2011, will commit pension funds to investing 5 per cent of their assets in “unlisted equities” by 2030.
The changes follow calls from business leaders including Sir Jonathan Symonds, chairman of the drugmaker GlaxoSmithKline to encourage British pension funds to back fast-growing companies.
Responding to the changes, Sir Jonathan said they will increase pensioners’ returns while ensuring Britain’s most innovative companies have the support to grow in the UK.
The UK has the biggest pension market in Europe, worth more than £2.5tn, but comparable schemes in Australia invest 10 times more than those in the UK.
Defined contribution schemes in Britain invest less than 1 per cent of their assets in start-ups and other unlisted companies, compared to between 5 per cent and 6 per cent in Australia.
In a speech on Monday night at Mansion House, in the City of London, Mr Hunt said unlocking more investment in Britain “could have a real and significant impact on people across the country”.
For an average earner who starts saving at 18, they could increase the size of their pension pot by 12 per cent over their career, or more than £1,000 extra each year in retirement, he added.
And Mr Hunt said the extra £75bn of investment unlocked by the changes will “finally address the shortage of scale up capital holding back so many of our most promising companies”.
He said: “With cooperation between government, regulators and business closer than ever… we will deliver not just more competitive financial services but a more innovative economy.
“More money for savers, more funding for our high-growth companies and more investment to grow our economy.”
Former pensions minister Baroness Ros Altmann said the reforms were a “welcome start” but there is “a hell of a lot more we could do”.
She told The Independent at least a quarter of pension funds originated from taxpayers through tax relief and National Insurance relief, so that should be invested in Britain more than other countries.
Baroness Altmann said pension funds need to invest in the domestic economy overall, not just in higher risk growth companies.
“Pension funds could with lower risk projects to boost infrastructure, social housing, sustainable projects and growth initiatives that would otherwise be funded by taxpayers,” she said.
“Because there is so much taxpayer money in pension funds,” she added .
And another former pensions minister Sir Steve Webb said that while some of the investments will carry more risk, “there actually has not been enough risk taken” historically.
Sir Steve said investing in start-ups would probably be “riskier than bunging it on the FTSE or a global stock market tracker”. But he said the pension funds have “huge portfolios” to balance out the risks.
The Tony Blair Institute (TBI) said the measures were “a welcome step”, but questioned whether “a non-binding agreement between a small number of pension funds can generate the investment the UK so desperately needs”.
TBI policy director Jeegar Kakkad said: “These policies will only be successful if they serve as the foundation for more radical reform including large-scale pension fund consolidation.”
The nine pension funds which signed up to the reforms are Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G & Mercer.
Business leaders welcomed Mr Hunt’s announcement, which they said would “power growth” as well as creating jobs and boosting the Treasury’s coffers.
Serial entrepreneur Brent Hoberman, executive chairman of the Founders Forum, said the changes would be “welcome news” to UK firms.
He said: “The planned pension reforms will enable capital to be productively invested in funds and scaleup companies in the UK.
“This should be welcome news to the UK industries of the future, their ability to attract more funding will create more national champions and generate growth, jobs and increased tax revenue.”
Chris Cummings, chief executive of the Investment Association, said the reforms would “power growth by investing in British businesses”.
"The recognition of the central role of long term investment is the foundation of successful policy,” he said.
"With the right regulatory framework, pension schemes will be able to invest productively and sustainably, unlocking further investment for innovative growth companies, and improving returns for savers by broadening investment options,” he added.
