Pensions reform usually gets little political attention, so it's good to see the new UK government prioritising it. The Pension Schemes Bill, announced in the King's Speech, is taking forward measures announced by the previous administration, although hopefully with more urgency. As someone who advises on pensions and is a pension fund trustee, I have attended too many conferences only to be told there has yet to be progress on consolidation and the pensions dashboard.
More significantly, the new government has announced a pensions review with more radical aims. A first draft of the review is expected before the autumn budget, and new rules could be in place as soon as next year. Reforms are necessary because the current combination of 8 per cent minimum contributions, the £10,000 earnings trigger and the lower earnings limit on qualifying earnings produce inadequate savings for most UK workers. When you couple that with one of the lowest state pensions in Europe (38% of the EU average), we are storing up serious problems for the next generation of pensioners, particularly women and the low-paid.
A vital challenge for the taskforce of industry executives and ministers will be to propose ways to cut costs and improve investment options. The aim is to allow retirement scheme managers to boost pension pots by up to £11,000. Private pension funds currently impose massive charges on most pension products in pursuit of their profits. Expanding auto-enrolment without tackling charges will simply pour pension savings into the coffers of the City of London. You only need to look at what countries like The Netherlands have achieved to understand that there is a better way.
Another aim of the review is to ensure that pension funds are invested in the real UK economy. Most pension cash isn’t invested in any meaningful sense; it is gambled on shares, doing very little for the economy. Buying UK rather than overseas shares doesn’t change that, although it is absurd that only 2% of pension funds are gambled on British companies. In fact, some argue that pension saving damages the economy because it takes spending away from consumption. The UK has six and a half trillion pounds worth of pension fund money - roughly two and a half times our annual income. That money is not used creatively to invest in the UK economy.
Will Hutton correctly identifies a key problem – we have 30,000, often small, pension funds. There are around £225bn of stagnating surpluses, and the 2,000 very small, closed defined-benefit schemes should be merged into the highly successful Pension Protection Fund. He says, ‘Britain needs fewer and much larger funds than the smorgasbord of tiny, underperforming funds whose trustees guard their independence so jealously that property market nimbyism looks tame.’ The solution is larger funds, at least over £100bn, that can diversify risk sufficiently to invest more in productive UK assets.
We should be starting with public sector pension schemes. Reeves has announced that the taskforce will push ahead with a merger of the 87 individual pension schemes in the Local Government Pension Scheme (LGPS) covering England and Wales. The LGPS is the seventh largest pension fund in the world, managing £360bn worth of assets, and spends £2bn on fees. Pooling the assets in the LGPS would enable the funds to be invested in a broader range of UK assets.
We should be doing the same with the devolved Scottish LGPS. When I was the joint secretary of that scheme, we started looking at the options for consolidation and merger to cut costs and better invest the £36bn of assets. However, the project has moved at a glacial pace since 2018, primarily because of resistance from the small regional pension funds – the nimbyism Will Hutton was describing.
I am more optimistic than some commentators that Rachel Reeves is serious about reforming our pension system. Getting these assets working properly for future pensioners and the broader economy is crucial to her growth mission. As the Scottish LGPS experience shows, she must push hard to get past the vested interests holding Britain back.