Torsten Bell. Photo: © House of Commons/Roger Harris (CC BY 3.0)
The latest edition of pensions minister Torsten Bell’s book on the key challenges facing Britain has been published – setting out solutions to challenges such as pensions adequacy and the move away from UK equity ownership by pension funds.
The paperback edition of Bell's book, Great Britain? How We Get Our Future Back, was published today (20 February) but was originally written while Bell was chief executive of the Resolution Foundation and first published in hardback just before the General Election last year.
In the introduction to the new edition, Bell said the book aimed to assess some of the key challenges facing the UK and offer some solutions for the future.
While he points out some of the ideas he called for in his book – such as the consolidation of pension funds – are now the subject of the government's pensions review, the ideas he expresses were set out before Bell entered parliament and are not necessarily government policy or ideas he might pursue as pensions minister.
A key theme of the book was that the decline of large, active shareholders in the UK is "a story about pensions" – with Bell noting that the widespread closure of defined benefit (DB) schemes to new savers has seen a "decisive" move away from UK equity ownership by pension funds.
And, while he notes defined contribution (DC) schemes do hold some UK shares – these are often held only indirectly, via funds that often passively track the stock market.
In his book he said: "Taking all DC and DB pension funds together, directly held UK equities now make up only 2% of their over £2trn of assets. Our pension funds aren't paying attention to the quality, or absence, of investment plans from those running British companies. And neither is anyone else."
Bell said this wasn't the intention of pension reform over the past three decades – but it is the result.
He added: "The primary goal of pension policy is to help individuals build up savings for retirement, yet we've unaccountably forgotten that pensions are also our economy's financial plumbing. They affect our collective, as well as our individual, prosperity."
Bell said the task now is to build up a smaller number of far larger pension funds that have the "means and the incentive to be active owners of corporate Britain".
He said this objective could be achieved in three ways: "Today there are far too many DC schemes – 27,000 of them. We should reduce this to fewer than 250 by the end of this decade, forcing funds that aren't delivering value for money for savers (because their costs are too high or their returns too low) to merge with better-performing rivals.
"Secondly, the £300bn of assets currently held across 86 local pension funds in England should be brought into one consolidated fund. This would start to match Dutch and Canadian schemes which have the scale to be active owners of companies and infrastructure – for example, the Ontario Teachers' Pension Plan owns outright the White City Place redevelopment of the former BBC headquarters in west London.
"Lastly, we should extend the remit of the Pension Protection Fund (PPF), which exists to rescue DB funds when an employer becomes insolvent, so that it can absorb some of the solvent DB schemes that employers are hungry to offload. The PPF itself wants to do this."
Bell added: "These are technical but significant reforms to ensure that there are active domestic owners of British Capitalism, who will hold executives to account if they just focus on immediate profits."
Pension adequacy
In his book, Bell also touches on the issue of pensions adequacy, noting that, while auto-enrolment has transformed the pension landscape – increasing the share of employees with a workplace pension by 68% between 2012 and 2021 – some 13 million of us were under-saving.
He said: "The default contribution rates for employers and employees are 3% and 5% of earnings respectively. To build on the progress of the last decade, we should gradually raise both up to 6%."
Bell said that, alongside improving incomes in retirement, it was time to create a "sidecar" savings account to tackle financial vulnerability.
He said: "Two percentage points of the increase from 8% to 12% default pension savings should initially flow into this easily accessible account until the balance reaches £1,000, when it would roll over into your pension. This would be an enormous change, making sure almost everyone has some cash savings available so they can avoid taking on a high-cost debt or payday loans when a financial shock hits."
The paperback edition of Great Britain? How We Get Our Future Back is published by Vintage Books.
