The UK needs to invest in its infrastructure, its ideas and its entrepreneurship. Most countries rely in part on their domestic pension funds for this investment, but the UK’s pension system is broken and in urgent need of sweeping changes. 

The UK has seen the almost total liquidation of UK defined-benefit pension fund holdings in UK equities. This has depressed valuations of UK companies, constrained business investment and limited the supply of growth capital available to innovative businesses. Despite having the third largest pension market in the world, the UK has no pension funds in the global top 40.

Both pensioners and our economy have suffered as a consequence. For pensioners, returns from UK pension funds have been amongst the poorest in the industrialized world. For the economy, the UK is suffering from a lack of investment in our infrastructure, our ideas and our entrepreneurial energy, which despite everything remain amongst the world’s best.

The pension-fund crisis of September 2022 was a warning shot that exposed the system’s fragility and the risks to pensioners’ financial security. The need for action is urgent.

While the supply of creative energy, dynamism and ambition has always been abundant in this country the supply of long-term equity risk capital to unlock and achieve its potential has over the past two decades simply drained away. 

This mismatch does not do justice to this nation’s talents. If nothing is done about it, this disconnect will be magnified as our remaining DB pension assets are gradually transferred to insurance companies via “buyouts” and what remains of their domestically held equity capital will be liquidated to buy bonds and lost forever.

Our recent paper at the Tony Blair Institute recommends three priorities for reform. 

First, we should create “GB Savings”, a £400-billion superfund with a 100-year investment horizon. Instead of a UK company having to become bankrupt for its pension fund to be transferred to the PPF and professionally managed at scale, it would simply have the voluntary option of transferring itself in with a required payment or scheduled payments of a capital buffer for continuity of benefits. This capital buffer would replace the employer covenant with assets and liabilities transferred to GB Savings, with no further recourse by the fund to the original sponsor nor any further inclusion in its balance sheet.

Second, we would incentivise wider consolidation in both defined benefit and defined contribution pension funds. To encourage competition in the market, we would incentivise wider consolidation in the def pension fund industry by making pension fund tax advantages dependent on consolidation.

Third, we propose exploring options for future GB Savings superfunds. Having established GB Savings, the government should explore the opportunity to establish further replica GB Savings Funds that participate in consolidation in parallel to the original GB Savings (and modelled on its operations). Primary candidates for such GB Savings Superfunds include the eight local government schemes, the troubled Universities Superannuation Scheme (which is currently having a fight about the accounting method for determining its liabilities), the 27,000 DC schemes, and ultimately, the unfunded DB public sector pension schemes. 

Through this approach, the UK would have around half a dozen global scale (£300 billion to £400 billion apiece), professionally managed, long time-horizon diversified funds by 2030. These changes would secure better outcomes for UK pensioners and release capital for investment in long-term growth. They would reinforce national security by reducing the UK’s dependence on foreign capital. And they would begin the process of restoring dynamism and vitality to the UK economy.

Jeegar Kakkad is Director of Policy at the Tony Blair Institute for Global Chance. The full report can be read here.

Write to us with your comments to be considered for publication at letters@reaction.life