{"id":26303,"date":"2024-11-19T15:04:32","date_gmt":"2024-11-19T15:04:32","guid":{"rendered":"https:\/\/www.open.ac.uk\/blogs\/news\/?p=26303"},"modified":"2024-12-02T15:27:06","modified_gmt":"2024-12-02T15:27:06","slug":"the-uk-government-wants-to-shake-up-pensions-but-it-cant-guarantee-that-megafunds-will-want-to-invest-in-britain","status":"publish","type":"post","link":"https:\/\/www.open.ac.uk\/blogs\/news\/arts-social-sciences\/the-uk-government-wants-to-shake-up-pensions-but-it-cant-guarantee-that-megafunds-will-want-to-invest-in-britain\/","title":{"rendered":"The UK government wants to shake up pensions \u2013 but it can\u2019t guarantee that \u2018megafunds\u2019 will want to invest in\u00a0Britain"},"content":{"rendered":"
\n

The UK chancellor Rachel Reeves talks a lot<\/a> about achieving better growth. And the latest figure \u2013 economic expansion in the last quarter of just 0.1%<\/a> \u2013 suggests plenty of room for improvement, says Jonquil Lowe<\/a>, Senior Lecturer in Personal Finance at The Open University.<\/p>\n

The evening before that gloomy figure was announced, Reeves revealed<\/a> her latest plan to get things moving \u2013 pension reform. And while there was some mention<\/a> of potential benefits for actual pensioners, it\u2019s clear that the main incentive for change is to channel more of their pension fund money into UK investment.<\/p>\n

This will be done through two main sets of reforms. The first concerns the Local Government Pension Scheme (LGPS) for England and Wales, which has 6.7 million members and assets worth around \u00a3392 billion<\/a>. Its members are mostly current and retired council employees \u2013 and mostly women<\/a>.<\/p>\n

So what is the LGPS?<\/h2>\n

The LGPS is essentially a cluster of 86 different schemes, which have already been combining to form eight \u201casset pools\u201d for the purpose of investing their pension funds and creating cost savings. The chancellor wants to ramp up consolidation through those eight asset pools, and also see a greater proportion of the funds\u2019 assets (currently 5%) being invested in local and regional projects.<\/p>\n

The hope is that this will boost the growth of local economies. The LGPS is a \u201cdefined benefit\u201d scheme, meaning that it promises members a pension in retirement worked out according to a formula based on their pay while they were working and length of time in the scheme. The way its assets are invested does not affect the amount of pension people get.<\/p>\n

The second set of reforms apply to workplace \u201cdefined contribution\u201d schemes. These are the sort arranged by (and contributed to) by an employer whereby employees build up a pot of savings to provide an income during retirement.<\/p>\n

Four out of five\u00a0don’t<\/em> review pension pot<\/h2>\n

Usually, employees can choose how they want to invest their pension pot, though schemes must offer at least one default strategy. The vast majority<\/a> of members go with the default. Four out of five<\/a> employees choose not to review their investments at all.<\/p>\n

Workplace defined contribution schemes are either run by a board of trustees, or by a pension company with whom the employee has a contract. The sector is highly fragmented, with thousands of different<\/a> schemes, many of them very small. However, over the past 12 years, there has been a move towards consolidation<\/a>.<\/p>\n

Again, the government wants to accelerate this consolidation to encourage the emergence of much larger pension investment funds, similar to those seen in Australia and Canada. Controversially, it is also proposing to make it easier for the assets of contract-based schemes to be transferred to other schemes without the consent of members.<\/p>\n

One claimed advantage of larger funds is lower costs. However, the Pensions Policy Institute<\/a> has found that cost savings tail off once a fund reaches around \u00a3500 million. But again, the key driver for the government is to create funds that are large enough to take on additional investment risks \u2013 without jeopardising their ability to provide people with financial security in retirement.<\/p>\n

Larger funds would free up some pension money to invest in areas such as infrastructure and private equity, with potentially high growth prospects. Such investments tend to be \u201cilliquid\u201d (difficult or impossible to convert into cash at short notice) so are suitable only for long-term investment.<\/p>\n

More money, more investment?<\/h2>\n

The government claims that including such higher-risk investments in the mix can \u201cdeliver better returns for savers\u201d<\/a>. This is likely to be broadly correct, since it is a fundamental investment principle that higher-risk investments need to offer higher returns in order to attract investors. However, evidence<\/a> suggests that the extra return from investing in illiquid assets could be as low as 1% a year over the long term.<\/p>\n

Nevertheless, Reeves is hoping that an additional flow of funding from larger pension schemes (\u201cmegafunds\u201d) will boost investment in the UK economy.<\/p>\n

But it\u2019s not as simple as that. The idea that simply increasing the amount of savings in an economy will inevitably cause investment to rise was debunked nearly a century ago.<\/p>\n

What is all boils down to<\/h2>\n

Back in 1936, the influential economist, John Maynard Keynes<\/a> showed that the most important factor when it comes to investment is what he referred to as businesses\u2019 \u201canimal spirits\u201d. In other words, it all boils down to a feeling of confidence about whether or not investments will lead to a good return. And that will depend on how the other elements of Labour\u2019s growth strategy play out.<\/p>\n

Similarly, pension fund managers and savers need to be confident that the UK \u2013 and in particular sectors such as private equity and infrastructure \u2013 are the best home for some of their pension pot. The general advice for any investor is to diversify savings not just across different assets (equities, bonds, cash, property) and sectors (manufacturing, services, large companies, smaller ones), but also different geographical regions.<\/p>\n

So as these new policies for pension schemes unfold, anyone with a pension may want to have a careful look at where the default fund is investing the money they will rely on in the future. They may even consider choosing their own investment strategy instead.\"The<\/p>\n

This article is republished from The Conversation<\/a> under a Creative Commons license. Read the original article<\/a>.<\/p>\n

Picture credit: PICNIC-foto<\/em><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

The UK chancellor Rachel Reeves talks a lot about achieving better growth. And the latest figure \u2013 economic expansion in the last quarter of just 0.1% \u2013 suggests plenty of room for improvement, says Jonquil Lowe, Senior Lecturer in Personal Finance at The Open University. The evening before that gloomy figure was announced, Reeves revealed […]<\/p>\n","protected":false},"author":19,"featured_media":26306,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,15],"tags":[1525,1640,1689,2198],"class_list":["post-26303","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-arts-social-sciences","category-society-politics","tag-news-home","tag-ou-home","tag-pensions","tag-the-budget"],"_links":{"self":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/26303","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/comments?post=26303"}],"version-history":[{"count":3,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/26303\/revisions"}],"predecessor-version":[{"id":26320,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/26303\/revisions\/26320"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media\/26306"}],"wp:attachment":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media?parent=26303"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/categories?post=26303"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/tags?post=26303"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}