The government should direct more pension money into UK growth companies than the earmarked 5 per cent to improve infrastructure and the prospects for British businesses, Baroness Ros Altmann has said.
She welcomed the chancellor's move to encourage pension funds to invest in illiquid assets to boost returns as well as economic growth, but said 5 per cent within seven years was not going far enough to pave the way for a stronger economy in the long-term.
At last night's (July 10) Mansion House speech Jeremy Hunt said some of the UK’s largest defined contribution pension schemes had agreed to commit 5 per cent of their default funds to unlisted equities by 2030.
The group represents two-thirds of the UK’s DC pensions market, and the agreement could amass up to £50bn in investment into high growth companies, if the rest of the market follows - currently they invest less than 1 per cent in unlisted companies.
Hunt said his aim was to enable the UK’s financial services sector to increase returns for pensioners, improve outcomes for investors and unlock capital for UK growth businesses.
Altmann, who was pensions minister in the David Cameron government, backed the cause but said: "I would urge the chancellor to be bolder in his welcome initiatives to ensure more of our domestic pension fund contributions are directed to benefit British growth."
She said with a fiscal deficit soon exceeding 100 per cent of GDP, as projected by the International Monetary Fund, and domestic institutions reducing support for British assets, "it is time for the chancellor to seize the opportunity to ensure more of our domestic pension assets are used to boost British growth and pave the way for a stronger economy in the long-term.
"It is time for revolution, not evolution, with more money being used at home, rather than leaking overseas.
"Britain is falling behind in terms of productivity and technology funding, as well as eroding the once-robust domestic institutional asset base that supported UK companies. This is threatening our country’s position as a global financial centre that punches well above its weight and can help to increase national wealth to fund public services and sustainable growth."
The government has also asked the British Business Bank to test whether it can facilitate third party pension investment into growth companies. Its existing commercial arm has more than £15bn of capital invested in 20,000 companies.
Additionally it is establishing a long-term investment fund for technology and science, with an initial backing of £250mn. This initiative seeks to attract DC pension money to support science and technology companies.
Though welcoming both initiatives, Altmann said again far more money could be spent from pension assets on such initiatives, "if only the caution of regulators and trustees were replaced by ambitious long-term investment in a broadly diversified range of assets that can benefit all."
She added: "There is a potential for a win-win situation, boosting the prospects for British businesses, UK financial markets, the domestic economy, and society – while also delivering better risk-adjusted long-term returns for pension holders.
"The Local Government Pension Schemes are fully underwritten by taxpayers and just trying to unlock £25bn by 2030 also seems relatively unambitious.
"These pension funds could be harnessed to boost local housing projects across the country, to improve business conditions and infrastructure across the regions and still deliver good returns over time from a carefully constructed portfolio of assets spread across sectors and regions."
Finally, she said, encouraging more UK pension funds to invest in domestic quoted equity markets could help reverse the decline in quoted UK equity market attractiveness.
"Plenty of work still to do, let’s hope this is just the start of making better use of UK pension assets, both from defined contribution and defined benefit funds, to boost all our futures."
But others have pointed to the potential risks in channelling pension money into high risk assets.
Tom Selby, head of retirement policy at AJ Bell, said: "While this desire to corral pension money into the UK economy is understandable, there is a danger hard-working savers will simply be forgotten about in all of this. It is also important the benefits and potential risks of these reforms are carefully explained to savers.
"Claims from the chancellor last night that the average DC pension saver will see their retirement pot increased by 12 per cent, or £1,000 a year, for example, as a result of greater levels of allocation to illiquid, high-risk investments are deeply concerning.
"It is, of course, possible that these assets will deliver greater returns than existing investments – but to suggest this with such certainty without mentioning the risks involved is dangerous."
He added: "As these reforms move from consultation to reality, it is vital the structures that exist in the UK to protect savers, including regulators and trustees, remain entirely focused on the needs of savers, rather than the political goals of the party in power."
The government is to launch a call for evidence this week on the role of the Pension Protection Fund and the part DB schemes play in productive investment.
It will also look at the culture of investment decisions and pension trustees’ fiduciary duty across DC and DB pension schemes, through a call for evidence launched jointly between the Treasury and the Department for Work and Pensions.
carmen.reichman@ft.com
