In these desperate times, everyone wants to find some money down the back of the sofa. Politicians are no exception. Taxpayer cash is difficult to generate – witness the growing disquiet on Conservative backbenches at the billions of pounds raised by chancellor Jeremy Hunt’s long-lasting freeze on income tax thresholds.
Until fairly recently, borrowing from international investors carried an ultra-low price tag, but since the Liz Truss and Kwasi Kwarteng mini-budget debacle last September Treasury ministers have been unable to consider adding to the public debt as a low-cost exercise. Short-dated gilt yields are back up to the level of the Truss era, raising the cost of government borrowing.
And so the search for free money goes on, most recently alighting on the trillions of pounds lying around in UK pension funds.
Hunt is interested and said as much in his last budget, when describing the potential for pension money to unlock investment opportunities. Shadow chancellor Rachel Reeves has mentioned pension funds several times in recent speeches, saying they could provide the spur to long-term growth Britain desperately needs.
A recent report by the Tony Blair Institute (TBI) argues for an unprecedented consolidation of the many and varied occupational schemes into a series of superfunds.
It makes a reasonable argument, as many before have made, which is that if only a fraction of this Himalayan mountain of cash could be redeployed to productive projects, Britain could regain its glory days and once again be the engine of global growth.
Unfortunately for the authors, this narrative is unlikely to reach its necessary conclusion without slaying a Game of Thrones-like cast of villains.
Asset managers are among them, drunk on the commissions and charges applied to every pension fund. Then there are the hangers-on who add another layer of charges – the lawyers and accountants. And the actuaries, who provide the “science” at the heart of schemes, have often been proved wrong in their judgments on how long we will all live and how much money we will need to live on before we die.
Then there are the accounting rules and safeguards constructed after the Robert Maxwell scandal, which wrap schemes in layers of legal protection. Arguably, these rules force pension trustees to act with too much caution, but they are the rules.
In his budget speech in March, Hunt said his autumn statement would include measures “to unlock productive investment from defined contribution pension funds and other sources”.
There is speculation he may say a bit more about his ideas in his Mansion House speech next month. He is understood to have read the TBI report and liked it. What is less clear is how any of it can be implemented when previous governments have already kicked around such ideas and found it impossible to slay the City pension managers, rewrite the pension rulebook and, in effect, instruct private pension savers to take extra risks with their money.
Superfunds are the answer, say the report’s authors, with most existing schemes merged into just a handful across the private and public sector. The schemes would be better managed by the Pension Protection Fund (PPF), it says, which already has a brief to invest £40bn worth of funds without a sponsoring employer, usually because the employer has gone bust.
The PPF has a strong record of investment, averaging 9% investment gains against an average 6% among the 4,000-plus existing solvent schemes. However, it is a not-for-profit organisation with a government guarantee securing its commitments to its members. Surely if the PPF absorbed 4,000 currently viable schemes – from the BP and BT schemes to those of small manufacturers – Hunt would become a major pension-scheme guarantor at the current level of benefits, when the PPF at the moment is just a backstop?
Even should he accept becoming a guarantor on such a scale, he would have to encourage the PPF to invest in projects that carry a higher risk than anything it has done so far. Will Hunt take that responsibility?
Alecta is a scheme that manages the pensions of 2.6 million people and 35,000 companies in Sweden. It has assets of £80bn. It is a superfund. In April, its boss lost his job after making huge losses on mid-sized US banks – including Silicon Valley Bank, which went bust. It shows that there are no free lunches.
That said, Hunt could consolidate the 86 funds that make up the £340bn local government pension scheme. They operate in the same way for their 6.1 million members. The government already has direct control and could dictate terms.
Hunt could make a start with those funds – except they are mostly tied to Tory county councils that see their pension schemes as a source of prestige and power. They will defeat him, just as wider reform will prove to be too difficult.
