While the nation is braced for potential tax changes in the upcoming Budget, many in the pension world are contemplating other longer term reforms to defined contribution pensions that could see savings invested in more illiquid stocks.
The Pension Review being undertaken by the chancellor and pensions minister is looking at new ways to get more money into UK listed and unlisted equities – especially 'high growth' businesses – and infrastructure, where capital is apparently lacking.
At the same time they hope to achieve better long-term returns for people's DC pension pots, which many fear will not cover savers in retirement.
There are likely to be further reviews of default fund DC saving, including contributions and additional consolidation, but the urgency of investing in illiquids and UK assets has been compounded by the government's desire to get the British economy firing again.
Many, especially professionals in the City and pension consultants, believe such a move is a no brainer, citing defined benefit pension funds and DC funds in Australia as success stories.
James Roe, UK equity capital markets co-lead at law firm A&O Shearman and an IPO specialist, is strongly in favour.
He says: "The government is struggling with a number of economic and social problems. One is people not saving enough. When people reach retirement, will they have enough money to live off? Will they be able to provide for their health needs? This depends on the amount they save and the return they get on their savings.
“Our economy is struggling; there is a real concern with growth and productivity. To support growth, you need investment. Investment requires capital, and one source of capital is people’s savings. In an ideal world, you would help match peoples’ need for investment opportunities with businesses’ need for funding.”
Others, however, are worried that we could be opening up DC pension savers to more risk, greater charges, and the possibility that it could all blow up and lose savers money.
The drive to invest DC funds into illiquids first became official just over a year ago, when then-chancellor Jeremy Hunt announced the Mansion House compact, whereby nine DC pension businesses promised to allocate 5 per cent of their default DC funds to unlisted equities.
A year on, chancellor Rachel Reeves has picked up this baton and is carrying it further, with the Pensions Review and statements suggesting DC investment should go into 'growth companies' (that is, those which have survived their early stages and are just about to turn a profit), and also private equity and infrastructure. Yesterday HM Treasury and DWP announced a call for evidence on a number of issues, including whether DC funds should increase investment in UK assets, both listed and unlisted, and infrastructure.
Reeves said a few weeks ago after visiting Canada: "I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment."
