The Chancellor will order pension funds to be consolidated into “megafunds”, which must manage £25 billion in assets by 2030 and have some of this invested in UK firms.
The UK Government insists that the interests of savers “are at the heart of our pension reforms” – but would you bet the house on the British economy if you had it your way?
The Government’s reasons for reforming the system are straightforward and, most experts will tell you, compelling. Pension funds are huge pots of money which are relatively unproductive.
They are invested in safe bets like government bonds, which provide slow and steady returns; perfect for retirement planning.
The question the Treasury has dared to ask is this: What if they were really put to work? Instead of coasting along, they could ride the high seas of the private markets.
This is, as the Government helpfully pointed out in its press release about the new reforms, a way of generating better pay-outs for pensioners when retirement comes around. It also frees up huge pools of capital to be invested into British businesses, which will hopefully boost the economy and give the Government some breathing room in its self-imposed fiscal straitjacket.
But you needn’t be Gordon Gekko to work out that high reward is usually accompanied by higher risks.
By encouraging pension funds into the opaque and volatile world of private investment, the Government is straightforwardly putting people’s life savings at the mercy of the market’s vagaries.
READ MORE: Experts warn Labour’s pension reforms pose ‘high risks’ for savers
Think of the 2008 financial crash. Mortgages were sold to people who couldn’t afford them and investors packaged them as profitable financial products for speculation.
For a time, it was fantastic. It fuelled economic growth and made homeowners out of Americans who would otherwise have been priced out of the market.
But when the boom turned to bust – as it always must – the consequences were more painful as the speculation was not based on abstract capital but the roofs over people’s heads.
The last Labour government suffered from an overconfidence in the power of financial markets. Remember Gordon Brown (below) hailing the end of boom and bust?
It appears Labour continue to suffer from the same malaise.
Add to this other risks. By directing the pensions of British workers to be invested into the British economy, the Government is telling funds to put all their eggs in one basket, breaking the most elementary rule of investing.
If the economy tanks, the funds tied up in these companies suffer and pensioners take a double hit. Now they’re in a recession and the value of their pension has tanked.
Elsewhere, there are whispers that by encouraging pension funds to invest in private markets, pension funds may divest from the bond market in large enough numbers to bring up interest rates.
This could lead to businesses struggling to borrow money – the key problem these reforms are intended to address.
The question is this: Would you trust Rachel Reeves with your pension? Perhaps ask her for a close look at her CV before answering that.
