Property-Owning Democracy

February 3, 2023

Thatcher’s dream of a property-owning democracy was probably one of the most radical ideas of her time in office. Houses and shares were made available to vast swathes of the population, and people gained a stake in their society.

Thatcher’s revolution, however, never quite made it to British pensions. This week the Government has taken steps to change this – and those steps should be welcomed.

Today, UK pensions, are far more likely to put into gilts and fixed income – that is, funding the state – than they are into infrastructure, private companies, public equities and real estate. Some pensions, like the state pension and those in the public sector, aren’t even invested at all. This effectively means that, far from a property-owning democracy, UK pensions are left with worse returns and less stake in their own society.

To address this, Government reforms this week will make it easier for pensions to invest in long-term illiquid assets, like airports, lab space, roads and bridges, and the companies of tomorrow. Not only will this mean that British pensioners will gain a greater stake in British assets, it will ensure better returns over a longer period.

Government has also announced a consultation into assessing Value for Money in pension schemes, which aims to shift the dial from keeping costs down to generating better returns. This is crucial if pensions are going to diversify. Many of the assets with the highest returns also cost more to manage, and a focus on cost alone essentially locks out British pensioners from the best assets, the assets that larger, institutional investors take for granted. As a result, it’s Canadian and Australian pension holders who are benefitting from high quality UK assets while British pensioners are left in the dust. The result is a perverse state of affairs where, for example, Canadian retired teachers have a greater stake in Heathrow and London City Airport than British pensioners!

Last week, Policy Exchange hosted Unleashing Capital, an event focused on how we can unlock the trillions in assets sitting in pension funds and insurers across the UK. It was extremely welcome to hear the Economic Secretary, Andrew Griffith MP, speak about precisely the issues above, and do so eloquently. There was also an overwhelming consensus, both in the panel event and a roundtable before, that British pensioners are being left out of the very assets that are securing the retirements of pensioners across the globe.

Government’s commitment to fixing this is admirable, but Government should go further still. On the public pension side, there is no reason why the Local Government Pension Scheme, with assets totalling £342 billion shouldn’t be consolidated. With 86 pension funds across England and Wales, this massive pool of assets is simply out of its league against large, consolidated, Dutch, Australian and Canadian funds. The Edinburgh Reforms included a pledge to introduce new guidance for LGPS pools; this should have real teeth, make it harder for individual funds to opt-out and push funds to consolidate.

When it comes to private pensions, Government has said it will aim to push consolidation in the DC market. This is again welcome, but it also needs to think seriously about pensioners’ relationship with their schemes. Here, Australia is the gold standard. Australians are able to use an app, similar to an ISA, to choose the risk they want for their pension investments, and their pot follows them automatically when they change jobs; your pension sticks to you, not your employer. There aren’t incredibly complex rules about transferring and consolidating pots, and there is real transparency about your funds performance. This is what a property-owning democracy should look like.

Around the world, British financial services are considered the epitome of the profession. It is all the more dismaying, then, that British pensions have not kept up. We need a better pension system, and it is hugely welcome that Government realises this too.

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