Changes to workers’ pensions are based on flawed analysis

Rachel Reeves Mansion House Speech last November was not short on ambition, promising “the biggest pension reform in decades”, and two public debates on what this means for ts implementation in a few days.

As part of “investment, investment, investment” to drive growth, the Chancellor’s Autumn Budget announced £100bn of spending over the next five years. To raise this without scaring the horses of the good market, Reeves wants to combine pension funds into “megafunds”, which then invest more in the UK’s “private property” – capital and real estate.

This “bulk-up” applies to the £400bn defined benefit scheme for local government workers in England and Wales (the £60bn Scottish local government scheme is not included) and to the supplementary (DC) occupational pension for private sector workers. The government also wants DC pensions to hold some in UK equities.

Political rhetoric aside, it appears that these “reforms” are based on incomplete and flawed analysis.

For DC occupational pension funds, the government wants a maximum of £25bn, and preferably up to £50bn, with limited “default” options. It is important that the changes do not come before 2030, after the date of the next general election.

The UK currently has around 30 “master trusts” authorized by the Pensions Regulator, and a further 30 “contract-based” providers, with combined assets of £480bn.

DC pensions certainly require a minimum asset size to spread sustainable costs, and promote good governance, but the government’s analysis of why the limit should be above £25bn is weak , and its comments on Canadian and Australian pensions are selective or irrelevant.

For example, all of Canada’s “Maple 8” pensions that Reeves is so passionate about are public sector defined benefit plans — including Ontario’s three plans for teachers, medical workers and workers local government – or subsidize Canada’s national pensions. we have nothing on UK DC pensions.

Yes, Australia’s superfunds are bigger than UK DC pensions, but they have been around for a long time, and have much higher annual contributions (while the UK government still he works. delay in checking to increase the minimum registration number). But Australia is also more concentrated than the UK, with the top 10 projects accounting for a much smaller proportion of total assets than the UK.

DC investors should make their investment decisions for the two reasons of increasing international diversification and reducing costs.

What exactly do DC savers get out of investing in the UK, apart from national glory, such as buying War Bonds?

The analysis from the Government Auditors Department published in support of the Mansion House Speech is not encouraging. It concludes that the potential returns to risk for DC savers if they move away from holding international funds – mainly in the US – to UK equities and private equity, are almost the same. Any differences over 30 years of average savings are lost during the rollover.

Since the potential returns are the same, DC investors should make their investment decisions for the two reasons of increasing international diversification and reducing costs.

UK stocks represent 4 per cent of the MSCI World Index – US stocks, dominated by large technology companies, make up 70 per cent. But the UK equity allocation for DC pensions is it is still 8 percent, which is twice the “neutral” weight.

There are good reasons for UK investors to be overweight in the UK – lower regulatory fees and costs, no need to raise funds in sterling, and many companies of the UK operates overseas, offering international brands.

The chancellor can always deliver balances, and give a boost to the UK’s finances, by bringing back the fractional tax credit abolished in 1997 by the previous Labor chancellor, Gordon Brown. The main reason for Australians to hold Australian currency appears to be the Australian shares tax credit. Doing this in the UK will surely cost a lot of money, and surely it is better to give tax breaks directly to companies that invest in their businesses?

When it comes to reducing administrative costs, the rates for private UK trackers are much higher than for public trackers that don’t work. To add insult to injury, the processing fees, which are paid on top of the annual fees, are not included in the 0.75 percent vehicle registration fee.

Meanwhile, the new pensions minister, Emma Reynolds, has also stepped in a warning that “the government could force pension funds to invest more in UK assets”. He did not explain how this would work, however, following the usual rules and regulations of fiduciary pension trustees to act “in the interest” of their members.

He suggested that the government could reduce the tax break on overseas investment funds, so as to undermine the confidence of saving pensions, which is sometimes weak.

Over the years various overseas governments have tried to dictate how pensions should be invested, none of which have worked well. Let’s hope the Labor government quietly drops the idea of ​​”forcing” UK pension funds to invest in the UK.

John Ralfe is an independent pensions adviser. X: @johnralfe1