Could Pension Reform Spur Good Growth?

Last night, Rachel Reeves delivered her first Mansion House speech. Having set out how the Government will approach public finances in the Budget two-weeks ago, Reeves has now outlined a key part of the Government’s strategy to boost economic growth. The word on everybody’s lips is pensions, but will it result in good growth?

The speech divulged what Reeves intends to be the “biggest pension reforms in decades”. By consolidating the UK’s fragmented public sector pensions into eight large “megafunds” the Treasury is aiming to follow the approaches of Canada and Australia, where large funds are able to invest in assets with a greater potential for generating growth. Pensions Minister Emma Reynolds suggested that the reforms could unlock £80 billion of investment into “new businesses and critical infrastructure.”

The large pools of capital create the firepower to invest in much-needed infrastructure projects. Alongside the Government’s longstanding intention to loosen planning regulations to get building going, it’s more likely the money can be married to credible opportunities too. But funds will not be obligated to invest in the UK, so while pension savers might benefit from new opportunities, it’s not a given that the British economy will too. Much will ride on the stated commitment to put in place targets for a percentage of investment to be in local economies.

Without more direction, investment in infrastructure alone does not necessarily equal growth, let alone growth that will solve Britain’s various crises and reduce inequality. For example, Canadian pension funds own a fair chunk of Thames Water - arguably a poor investment choice and certainly not in Canada. Without a clear outline of what kinds of assets the new funds will invest in, there is no reason to believe they will necessarily invest in beneficial, sustainable and profitable businesses in the UK.

It is possible that the new funds could lay the foundations for a scale-up revolution, however. In theory, large portfolios give funds the ability to balance high risk, high growth potential investments with safer ones. Therefore, Reeves will be hoping that the more diversified funds will not only increase returns but also encourage investment in high growth potential assets. But for this to happen, the changes need to spur increased investment to Britain’s long-tail of regional, smaller, sometimes family-owned firms.

If the Government is purely looking to create higher returns for public sector pensions, it is certainly on the right track. However, in order to encourage greater investment in the UK, the reforms must be coupled with strong incentives to invest in the UK and in our scale-up businesses.

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