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In his recent Mansion House speech, Chancellor Jeremy Hunt addressed some of the shortcomings within the UK’s pension system. He acknowledged the low potential returns on pension investments and the lack of support for high-growth domestic companies. However, his proposed reforms fall short of providing a solution.
The main issue lies in Hunt’s three objectives: prioritizing a strong and diverse government bond market, securing the best outcomes for pension savers, and strengthening the UK’s position as a financial center. While the first objective is valid, the second seems to advocate for captive investors in UK debt, which ultimately benefits the government rather than savers. The third objective reflects a misunderstanding of the financial sector’s role in creating economic prosperity. Hunt should have focused on ensuring sound pensions and widespread prosperity as his primary goals.
As highlighted in the report “Investing in the Future: Boosting Savings and Prosperity for the UK” by the Tony Blair Institute for Global Change, the best approach to achieving these goals is through increased contributions to a limited number of large, professionally managed funds that are invested in diverse assets.
However, the UK currently has over 5,000 defined benefit pension funds, which are forced by regulations to invest in government debt with minimal returns and significant interest-rate risk. The fragmentation is even worse for defined contribution plans, with nearly 27,000 funds. With most private sector defined benefit plans closed, future retirees will rely on inadequate defined contribution plans, leading to financial insecurity for both individuals and the country.
Unfortunately, Hunt’s proposed reforms do not address these fundamental issues adequately.
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Firstly, Hunt does not offer a concrete plan for consolidating private sector defined benefit funds into larger and more actively managed funds. Instead, he seems to accept the insurance sector’s role in handling failing pension schemes. However, the transfer of assets to insurance companies comes with high costs and conservative investment choices. An alternative solution would be consolidation into the Pension Protection Fund, which has proven successful. While Hunt mentions this option, he does not prioritize it. There is also limited discussion about consolidating local authority pension plans, indicating a lack of radicalism.
Secondly, Hunt fails to propose radical plans for consolidating defined contribution schemes or encouraging the development of multigenerational collective schemes. The current contribution rates of 8% are insufficient for most pensioners, especially those who cannot rely solely on the state pension.
Thirdly, Hunt claims that the “Mansion House compact” commits funds representing two-thirds of the UK’s entire workplace market to allocate at least 5% of their default funds to unlisted equities by 2030. However, if the current defined benefit system continues to shift towards insurance buyouts instead of being consolidated and invested in equities, there may be a significant liquidation of productive assets that dwarfs the funds allocated in the compact.
While Hunt acknowledges the flaws in the current system, his lack of radicalism and focus on protecting existing interests is disappointing. We need to decide now where we want to end up and create a national, multigenerational pension system designed to provide decent pensions and support future prosperity. This system should facilitate adequate savings, investment in productive assets, and protection against volatile returns and uncertain longevity. Our current system fails on all fronts, and we must strive for improvement. If this government is unwilling to take the necessary steps, the next one must.
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