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Pension funds are the answer to the UK's economic recession – so say ministers, policy experts and almost everyone else. Any discussion about how to attract more investment into UK infrastructure, start-ups or stocks now includes Britons' retirement savings.
No doubt the same will be true in the Budget this coming week. British Finance Minister Jeremy Hunt made headlines last year for his efforts to direct defined contribution funds more to private companies. But ministers (and opposition politicians) have also been eyeing local government-defined benefit schemes as an easy pot of money to unleash growth. It's not that simple.
The Local Government Pensions Scheme has more than 6 million members. If it were a single fund, it would be among the ten largest funds in the world, with assets exceeding £365 billion.
It is easy to see why the government might see this as an easy way to compete with the likes of Canada's large public sector pension funds. However, in England and Wales, the LGPS is divided into 86 individual trusts.
it's a problem. Larger funds can access asset classes such as private markets that may be closed to smaller funds. Economies of scale can also mean superior bargaining power with outside managers, giving members better value.
This is not a new idea. George Osborne said in 2015 that the money should be pooled into six “British wealth funds”. The results are mixed. There are now eight bathrooms that vary in size. A government consultation published last year said just £145bn, or 39 per cent, of assets had been transferred from individual funds to pools. For example, funds in the Border to Coast Pension Partnership have pooled more than 83 percent of the investments. The percentage is much lower for others.
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Explanations range from the inability of some pools to meet the investment needs of partner funds to the reluctance of local government pension committees to relinquish control. Often, says Jigar Kakad of the Tony Blair Institute, there are no incentives. His research center has proposed making the tax benefits of pension funds dependent on consolidation.
Further restructuring will not be easy. The government was not obligated to how the complex should be structured. Assets have been pooled, but other functions of pension plans, including management or governance, have largely not been pooled, says Steve Simkins of consulting firm Isio.
Larger pots of money can benefit pension savers and encourage investment in illiquid assets – which can be higher risk and cost but potentially provide higher returns. But so far the assembly has been disorganized. The government has rightly been very sensitive about where pension money is invested. But clearer guidance regarding financial consolidation is required.
