Much of the noise around the recent Budget has centred on those subjects with emotional resonance with the public: painful tax rises for employers (and, as it will undoubtedly be passed on to them, employees); devastating changes around agricultural property relief; higher inflation. But in her Mansion House speech last week, the Chancellor had an opportunity to return to her key policy priority for the coming years: that is, driving higher investment. And on this occasion, there was much to be welcomed.
Since 2022, Policy Exchange has been highlighting the enormous opportunity that UK pension assets offer our economy. The UK market is the largest in Europe and the third largest in the world with some £3 trillion in assets. This a deep source of potential finance for future investment, which if properly tapped could provide a sustainable source of funding for wealth-generating infrastructure, as well as secure incomes for savers in retirement.
To pick out some particulars, Policy Exchange has called for three big reforms over the last few years. Firstly, in Unleashing Capital, we made the case that our still highly fragmented pensions market should be consolidated so that pensioners might benefit from scale, and to make it easier for schemes to invest in alternative assets like capital projects.
Secondly, in Growing Pensions Capital, we argued that the regulatory framework for the increasingly large Defined Contribution (DC) pension market needs to be reformed so that it promotes return maximisation, rather than simply risk (and cost) minimisation.
And finally, in the Property Owning Democracy, Policy Exchange argued that a concerted effort was required to improve access to financial advice for the next generation of potential retail investors, and to support wider financial ownership in the UK.
The previous Chancellor made great strides across these agendas in his own Edinburgh and Mansion House reforms. Hunt’s reforms were praised by Reeves herself in her speech at Mansion House. And the policies she announced as part of that speech will build on that progress in a meaningful way.
Amongst other things, she committed the Government to consolidation in the local government and DC pension markets, she has announced a consultation on addressing the “culture of cost before value” to deliver better long-term returns, and she has pledged “transformational” changes to financial advice regulation. These are welcome interventions, and they will go some way towards improving the UK investment environment.
Nevertheless, there remains much more to be done. Policy Exchange has spoken about how much can be learned from the Australians about effective pension reforms. Part of the reason that their system works so well is the high levels of transparency, competition and contestability, in conjunction with regulatory objectives that focus on maximising returns. Such transparency is conspicuously lacking in the UK at the moment, and the present value for money framework privileges lower costs over high investment performance. We are delighted that the Government is looking at the Australian model; we think it can go much further in replicating its strengths here in the UK.
At a more macro level, additional action is still required if pension capital is to actually drive higher investment in the UK, rather than seeking better returns abroad. Some have spoken about mandating higher domestic allocations, but not only might this depress returns for savers – it also would not fundamentally address the reasons why overseas destinations are a more attractive prospect for capital. A far better approach would be to scrap stamp duty on shares and deliver a pump-priming programme of planning reforms. That is what pension funds themselves are telling us.
And finally, the Government should move forward with the previous Chancellor’s plans to introduce a portable pension pot that follows workers from job to job. It’s the system used in Australia, it gives the individual saver much more control and ownership over their pension investments, and it would likely support higher savings rates. It would undoubtedly be a technically challenging reform, but it’s the sort of serious reform that a government intent on delivering growth and with a huge parliamentary majority would undertake.
Pension reform should be at the core of any plan to transform the UK’s economic prospects. It’s not just about ensuring greater prosperity for individual pensioners – although that is of vital importance if we want people to have prosperous retirements without ever increasing fiscal burdens upon the state. It is equally about boosting the sort of investment that will permanently increase the productive capacity of our country such as transport and energy infrastructure, and funding that investment in a way that promotes wide-based prosperity and national economic resilience.
Reeves’s Mansion House reforms are a step in the right direction. But there is much more work still to be done.