Two sides of the coin: the ￡50bn pension growth fund

Widely reported comments this week by shadow chancellor Rachel Reeves suggest Labour may be prepared to push pension funds into investing in fast-growing UK companies, as part of a ￡50billion ‘Future Growth Fund’ - a policy developed by Nicholas Lyons, Lord Mayor of the City of London.

What could go wrong with the idea and why might it work? Nick Corrin and I argue for and against.

AGAINST: No going for growth without transparency?

Forcing DC pension funds to invest in a UK Growth Fund will add risk for both members and the industry as a whole, while undermining public trust. ?

It is a cornerstone of the industry that private sector pension funds are independent, making it the duty of trustees to act in the best interests of beneficiaries. Mandating particular investments would upset this balance, setting a dangerous precedent for further government intervention and undermining public trust that retirement savings are safe from political meddling. ?

What is missing from communication surrounding the policy is an admission of where the burden of risk will fall, and who will bear the ultimate cost of any shortfall in investment performance. Unlike DB schemes where any deficit will need to be met by contributions of the schemes’ corporate sponsor, the risk for DC schemes sits squarely with the pensioner who could see their pot lose funds or deliver poor investment returns over their savings period.?

Undoubtedly, a UK Growth Fund represents an exciting initiative that has the potential to deliver economic growth. However, before forcing pension funds to foot the bill, we must be open and honest about where the buck stops.

FOR: No opt-out from innovation and action?

You can't tell people what to do with their pensions, cry the critics.

Have they not heard about auto-enrolment? Without it, the chances of 11m people starting to save during a 'lost decade' for wage growth would have been non-existent. ?

State-enforced action is already here, albeit with an opt-out clause to soften the message. AE has proved that if you want to make pensions work harder, a strong push in the right direction goes a long way.

The hope is that this investment will help push DC schemes to target higher investment returns so members don’t lose out. This is counter to the risk-adverse reputation that some believe the industry has, particularly with DB pensions that take a slow and steady approach. ??

Of course, AE hasn't yet gone far enough, which is surely an equal or greater concern than the investment risk of backing British businesses. The typical return on minimum contributions won't deliver anything like the retirement income previous generations enjoyed.

What's riskier: a national push to boost jobs, generate growth and increase pension pots? Or a drift towards pensioner poverty, with massive social implications and welfare costs? Good luck to the future Chancellor who has to make those sums add up.? ?

Winning at pension politics would be a major feat of communications strategy, from a starting position where trust in Government makes financial advisers look angelic. No-one wants to see the British Business Bank and the UK Growth Fund star in a sequel to the Woodford scandal.??

Maybe industry can concoct a better pension plan so future Governments can focus their energy elsewhere. What’s clear is that innovation is essential and there can’t be an opt-out from decisive action.??

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