A few days ago I was chatting over dinner to one of the UK’s top businessmen and he asked me a simple question: “How many tens of billions have been lost to the economy as a result of the pension reforms after Maxwell?”
It set me thinking. Maxwell was Robert Maxwell, the Czech-born one-time military hero, Labour MP and media proprietor sometimes nicknamed the “bouncing Czech”. I once worked for him and he was certainly a presence.
In November 1991, Maxwell went overboard from his yacht the Lady Ghislaine, near the Canary Islands, and drowned in circumstances that remain mysterious. The yacht was named after Ghislaine, his daughter, now serving a long US prison sentence for offences related to the activities of Jeffrey Epstein.
Maxwell’s death left behind more than a can of worms. Most notably he plundered £460 million from the Mirror Group’s pension fund in a vain attempt to prop up his collapsing businesses. Pensioners, powerless, were impoverished, and the authorities’ response was to make sure it could never happen again.
The eventual result was the Pensions Act 2004, which resulted in the establishment of the pensions regulator, the Pension Protection Fund (PPF) and probably embedded the cautious, low-risk investment strategies that characterise pensions to this day.
That is the context for the debate over whether UK funds should invest more in UK assets, supporting the economy. It is why, while the current Tory leadership plays silly games, there is continuity between the chancellor and her predecessor. Jeremy Hunt launched the Mansion House reforms in November 2023, to encourage pension fund investment in high-growth businesses, reforms taken further by Rachel Reeves.
As it happens, Hunt was on a star-studded panel on pensions I saw recently, at a conference at the London School of Economics in honour of the former monetary policy committee member and LSE alumnus Sushil Wadhwani. The other panel members were Paul Johnson, outgoing director of the Institute for Fiscal Studies, Sir Steve Webb, pensions minister in the coalition government and walking pensions encyclopaedia, and Torsten Bell, the think tanker turned current pensions minister.
Hunt said this was one of the most important issues affecting the future of the UK economy, Webb provided a tour of the pensions landscape and Bell noted the queue of Australian and Canadian pension funds making their way to his office, seeking UK investment opportunities. Johnson illustrated the complexities by saying that he had spent much of the past three months trying to work out his own pension entitlements.
The big picture is that the value of UK defined benefit pension schemes — final salary and related schemes — is £1.2 trillion. Defined contribution schemes, into which most people in the private sector contribute, have some £600 billion of funds under management.
The second part of the big picture is that, if the reforms of the 2000s aimed to make pensions safer, they succeeded. There is a combined £160 billion surplus in private sector defined benefit pension schemes.
In other respects, though, to go back to the question I started with, all this has come at a big cost. There has been a two-pronged assault on business investment, and thus productivity and growth, as the pensions expert, campaigner and adviser Baroness Ros Altmann argues.
“Pension funds became a huge drain on corporate UK as employers have been forced to plough billions into funds rather than productive long-term investment and pension funds have also stopped supporting productive investment,” she puts it. “Most especially UK pension funds are no longer a reliable source of long-term equity capital, and this has cost employers and the economy dearly.”
• Reeves pledges to take on regulators and tear down barriers to growth
There are some striking statistics. While many look back to the 1950s as the golden age of pension fund investment in UK equities, as recently as 2006 a total of 32 per cent of the investment of defined benefit pension funds was in domestic equities. That proportion is now less than 2 per cent.
Defined contribution pension schemes have 6 per cent of funds invested in UK equities but that is in the context of a drop in the proportion of investments in all UK assets from 50 per cent in 2012 to 20 per cent now. Pension funds in Australia, New Zealand and Canada have a much higher proportion of their equity investments in domestic shares; 40-45 per cent in the case of New Zealand and Australia.
Of course, people will say pension fund trustees must do the best for their beneficiaries, even if that means investing outside the UK. But there is a chicken and egg argument here. There are many reasons for the relative underperformance of UK equities, including Brexit, but one is undoubtedly that the pool of available capital has been limited by the actions of pension funds.
Nor is it the case that investment decisions, particularly those relating to defined benefit schemes, have been of any more benefit to those within the schemes than to the economy. By investing heavily in gilts, these funds have been locked into low returns because of the low interest rates of the 2010s and quantitative easing (QE). As interest rates have risen, the value of these gilt investments has plunged, cutting the combined asset value of defined benefit schemes from £1.8 trillion in 2021 to £1.2 trillion now.
Nobody wants the government to be directing how private pension funds should be investing, including this newspaper’s editorial writers. But there is at the very least a moral obligation for UK pension funds to invest more in UK assets, and the point is well made by Altmann.
“At least 25 per cent of each pension fund originates from tax reliefs and 25 per cent can be taken tax free,” she points out. “Gross reliefs amount to over £70 billion of taxpayer money.” A similar 25 per cent of new contributions should therefore be invested in UK productive assets, she argues, “rather than allocating most of the money to boost other countries, not Britain”.
I find that quite a convincing argument. Others may disagree.
