Lou Davey is head of policy and external affairs at Independent Governance Group
In her first Mansion House speech as Chancellor, Rachel Reeves set out a vision to harness the UK’s pension capital to drive investment and growth.
The government's aims are worthy and can set industry on a path to unlocking investment opportunities; however, there are several challenges ahead if their ambitions are to be realised.
As a UK business, and one whose sponsors almost entirely operate in the UK, Independent Governance Group (IGG) has an inherent interest in supporting continued and sustained economic growth and innovation here. But if the government is to successfully implement these reforms, Treasury must work in partnership with industry to co-design reforms and avoid unintended consequences, ensuring they are practical solutions to the growth challenge.
Pension fund trustees owe their fiduciary duty to scheme members, not the UK economy. As professional trustees, we must be conscious of balancing the interests of beneficiaries with our obligations to the scheme sponsor. Therein lies the rub. The policy challenge is not whether pension schemes' capital should be leveraged to drive investment in the UK because there is an inherent benefit to economic growth. The challenge is what policy levers can and should the government pull to incentivise investment in the UK while also recognising schemes' obligations.
November's Mansion House speech was firmly focussed on the role of defined contribution and Local Government Pension Scheme funds – the absence of anything relating to private sector defined benefit (DB) schemes was stark, yet there is a role for them to play, albeit perhaps subtler.
Earlier this year, the former government sought the views of industry on how surplus could be used. As part of the Pension Review that is underway, Pensions Minister Emma Reynolds must consider the views of industry and work with us to create and shape a proper framework around return and distribution of surplus. Changing the current surplus rules could give way to greater investment in UK plc and productive assets – both by giving trustees and sponsors the confidence to invest surplus funds in a more productive way, and providing UK employers with funds to invest in their business. Furthermore, incentivising schemes to run on by allowing more flexible use of surplus could help achieve the government's aim of continued investment in the UK economy by sponsors that are UK-based, while also seeing continued investment in gilts.
However, there should be redlines. If we are going to enable businesses to extract surplus, there needs to be clear parameters around who benefits. A proportionate framework would be a win-win for employers and beneficiaries and the economy. Now, I recognise there is much debate around how surpluses could and should be distributed; but a collaborative approach to co-design will mean that industry and government can reach consensus on what those redlines should be. For example, it could be used for defined contribution benefits, discretionary increases, investment in innovative and sustainable technologies, investment in new infrastructure and physical assets, or to support a business' growth plans, ultimately helping to create more direct and indirect jobs.
As part of a holistic approach to leveraging pension capital to drive investment in the UK economy, we must also consider the role of buy outs. While much of the debate around the impact of buyout has focused on the increased costs of borrowing for government if insurers are not in the market for gilts, we must also consider what buyouts might mean for economic growth. At both the Labour and Conservative Party Conferences, there was consensus that financial services businesses in the UK are more risk averse than their international counterparts. When a defined benefit scheme sponsor is relieved of their liability after a scheme moves off their books, they may have a greater impetus and confidence to invest in their business and its future growth, and be more attractive to investors.
The government's objectives are to be lauded. As a UK business with ambitious growth plans, we see an imperative in supporting proposals that could lead to a sustained and continued flourishing of our economy.
That being said, government can't lead the proverbial horse to water and expect its thirst to be quenched. This is too important to not get right – we are talking about the financial security of millions of pension scheme members. We look forward to the government honouring its commitment to listen to industry, working closely with us and our peers to successfully deliver reforms that will support the government's growth agenda, and, importantly, secure good outcomes for members.
Lou Davey is head of policy and external affairs at Independent Governance Group
