Having read dozens of articles bemoaning London’s current financial malaise, I can imagine the Treasury team promoting ‘safe space ideas’ in search of initiatives to begin a turnaround. My imagined Treasury meetings promoting blue sky thinking (and other management consultancy speak) encourage even ‘whacky ideas’ to be aired. They do not get much whackier than the proposed ‘unlocking’ of £50bn of defined pension scheme cash, raised in a recent speech by Chancellor Jeremy Hunt. Hunt is wrong, and his meddling could have a disastrous impact on people’s savings.
Using words like ‘unlock’ is disingenuous; the surplus is not locked, and it may not be there in a week or month in a world where the so-called ‘one in one-hundred-year event’ seems to occur every six months. Someone should helpfully point out to Jeremy Hunt – ‘the value of investments can go up as well as down.’
Hunt gave his Mansion House Speech on 10th July. It focused on reversing London’s continued lack of favour as a financial centre and proposed ideas to encourage defined pension schemes to invest more of their ‘surplus’ money into high-growth, unlisted equity to boost economic growth. Pension fund trustees and their advisors have a lawful duty to take prudent steps to meet their obligations. Investing money in high-risk illiquid equity is unlikely to meet those criteria.
This pension ‘surplus’ is a valuation taken on a specific day. Assets are easy to value. The liabilities are not. XPS Pensions consultancy estimated that in July 2023, the 5,000 existing Defined Benefit Pension Schemes in the UK, representing close to 1 million people, had a surplus of £130bn above their current requirement needs. For context, these same schemes were £390bn in deficit in March 2022 and were also in deficit in January 2023. A surplus on Monday is a deficit on Friday; a surplus is simply a moment in time.
Defined Pension Schemes (a retirement plan where the employer guarantees a specified monthly benefit to the employee upon retirement) were created after World War II and peaked with 8m members in 1967. Since then, they have been the subject of a counterintuitive combination of meddling and disinterest. In the 1980s, the Thatcher Government, looking at the same so-called surpluses, decided companies could take a pension scheme remittance holiday. Companies stopped contributing, and employees had to continue to do so. Fine when markets boomed in the 1980s but dire in the 1990s and beyond.
The Government is faced with the reality that something must be done to reinvigorate investment and, most importantly, UK productivity. The (continued) absence of a post-Brexit industrial strategy and the shocking short-termism of this current ‘one foot out of the door’ Government all contribute to perception, which translates to investment - or not.
Opening the regulatory door that promotes a high-risk strategy for today’s pension fund surpluses where companies remain responsible for shortfalls while having no controlling say whatsoever in their pension funds investment strategy adds to negative sentiment; it does not diminish it. It is preposterous that pension fund trustees would take ‘high’ risks with a pension fund’s money where the sponsoring company is still obligated to write the cheque if these high-risk investments fail.
The Government shouldn’t meddle with where pensions put their money; the trustees have clearly defined fiduciary duty. Instead, government attention should be turned to increasing regulators’ powers and tempering the ultra-cautious actuaries, who pull the levers of hypothetical assumptions that make up deficits and surpluses. If the Government and the Bank of England worked together to create a more uniform discipline around the actuarial industries’ assumptions, there would be fewer contributions required by both employers and employees to deliver the goods on their pension returns.
Any UK Government suggesting that defined benefit pension schemes use what are, in fact, hypothetical surpluses to take high-risk illiquid positions in companies is irresponsible. High-profile pension disasters like Mirror Group and BHS rightly enrage the British public, who believe their pensions are sacrosanct and should not be toyed with to fill a deficit of policy ideas.