\n\t\t\t\t\tThe Chancellor\u2019s push for more UK investment by pension funds puts savers’ money at risk, experts warn\t\t\t\t\t <\/p>\n
\nInside the pensions crisis<\/strong><\/p>\n
Retirement feels more uncertain than ever, with nearly six in 10 adults unsure if they have enough time to save for a pension. Successive governments have struggled to address the issue. So, how did we get here, and what can be done to fix it?\u00a0The i Paper\u00a0brings you the essential stories on what went wrong with pensions, along with expert insights into the policies and solutions that could help secure your financial future.<\/p>\n
Read more:\u00a0<\/strong>Triple lock state pension is broken \u2013 here\u2019s how to fix it<\/a>\u00a0|\u00a0Teachers blocked from swapping big pensions for higher wages<\/a> | I\u2019m famous and I\u2019ll never be able to afford to retire<\/a> | How much you need to save each decade of your life to have a \u00a31m pension pot<\/a> | Why the state pension triple lock is closer to being axed than you think<\/a>\u00a0| \u2018I\u2019ll never be able to retire\u2019: The 45 to 60-year-olds with no pensions<\/a> | How Reeves\u2019s plan to boost UK investment using pensions could cost you thousands<\/a> | I\u2019m a finance expert \u2013 boomers will be the last generation of rich pensioners<\/a> | How your pension is at\u00a0greater risk from scammers than ever before<\/a><\/p>\n<\/blockquote>\n
Pension<\/a> reforms to increase UK investment as part of the Government\u2019s economic growth mission<\/a> could leave savers thousands of pounds worse off in retirement, experts have warned.<\/p>\n
The Chancellor\u2019s push for more domestic investment \u2013 dubbed \u201cpension fund nationalism\u201d by some commentators \u2013 will risk savers\u2019 money in the name of political objectives, The i Paper has been told.<\/p>\n
In her Mansion House speech in 2024, Rachel Reeves set out plans to force pension funds to combine into \u201cmegafunds\u201d, saying they could unlock \u00a380bn of investment in the UK.<\/p>\n
By pooling the pots together, the Chancellor hopes it will give pension schemes the firepower to invest in a broader range of UK assets, including infrastructure.<\/p>\n
Under the proposals<\/a>, the UK would introduce a minimum size for defined contribution pension schemes, a type of retirement savings plan where the amount someone receives in retirement depends on how much they and their employer have invested \u2013 and how well that investment has performed. Most people working in the private sector have this type of pension.<\/p>\n
The local government pension scheme, a large public sector scheme for people working with and for local government, will have its 86 separate funds condensed into fewer, bigger pots.<\/p>\n
The push for UK investment and bigger pension funds will affect both defined contribution (DC) schemes and defined benefit (DB) schemes.<\/p>\n
DB schemes, also known as final salary pensions, offer guaranteed returns based on the length of someone\u2019s employment and their final salary \u2013 providing a guaranteed income for life. These are more common in the public sector.<\/p>\n
But Tom Selby, head of public policy at investment platform AJ Bell, warned that \u201cconflating\u201d a government goal of driving investment in the UK and people\u2019s retirement outcomes \u201cbrings a danger because the risks are all taken with pensioners\u2019 money\u201d.<\/p>\n
This is because pension funds make investment decisions to get the best outcomes for savers, which has limited investments in UK-based infrastructure projects with uncertain returns, Selby said.<\/p>\n
\u201cThe desire to get more pension money invested in the UK is understandable, but my overarching concern is that the needs of the saver, whose money is ultimately going to be risked, will be forgotten about,\u201d he said.<\/p>\n
There needs to be \u201csome caution\u201d in \u201cthis push to use other people\u2019s money to deliver economic growth\u201d, which could go wrong.<\/p>\n
\u201cUltimately, the best way to encourage capital flows to UK businesses is to pursue reforms aimed at making the UK an attractive place to invest, rather than simply forcing people to invest here,\u201d he added.<\/p>\n
Why experts are worried<\/p>\n
Around 20 per cent of workplace DC assets are invested in the UK, down from around 50 per cent a decade ago, according to the Department for Work and Pensions. <\/p>\n
Around 30 per cent of public-sector DB funds are invested in the UK, mostly in UK equities, government bonds and property.<\/p>\n
Steve Webb, a former pensions minister and now a partner at pensions consultancy LCP, said his \u201cbiggest reservation\u201d about the reforms is that the saver \u201cis at the bottom of the pile of all this \u2013 they\u2019re almost an afterthought\u201d.<\/p>\n
The Government\u2019s own modelling found that moving 20 per cent of DC pension funds\u2019 assets from overseas equities to UK equities \u2013 private and public stocks and shares \u2013 would deliver \u201csimilar returns\u201d to the current strategy. Seventy per cent of private sector DC funds are currently invested in overseas equities.<\/p>\n
For a member earning \u00a330,000 per year saving at 8 per cent for 30 years, the change would deliver returns \u201cslightly above\u201d other strategies, though each pot would deliver between \u00a3330,000 and \u00a3340,000. <\/p>\n
The modelling by the Government Actuary\u2019s Department, published by the Department for Work and Pensions last November, assumed that UK equities would outperform overseas equities by one percentage point over 10 years, citing forecasts from JP Morgan, Blackrock, Amundi and other investment firms. Moody\u2019s, the leading credit rating agency, has predicted roughly equal returns.<\/p>\n
In a chart with the modelling published by the DWP, the Government\u2019s Actuary Department predicted that the current strategy would yield average returns of \u00a3340,936, compared with \u00a3341,587 for the pension with more UK equities \u2013 a difference of \u00a3651.<\/p>\n
However, if market conditions over the past 20 years persist, in which UK-focused investment strategies have underperformed overseas equities by about four percentage points per year, it would result in \u201csmaller\u201d pension pot sizes, the DWP said.<\/p>\n
In this scenario, the pension with more UK equities would be worth about \u00a3329,000, while the current strategy would yield returns of \u00a3338,000 \u2013 a difference of \u00a39,000.<\/p>\n
Webb said: \u201cThirty years hence, when all of this has worked its way through, you might get to, on average, a slightly bigger pension pot.<\/p>\n
\u201cThat\u2019s a very long time and a lot of cost and disruption. The first concern is that the member [of the pension scheme] is just not really at the heart of this.\u201d<\/p>\n
He said pension funds have moved the share of their equities in the UK down over time to take advantage of opportunities in other markets, such as in the US, where tech stocks have been lucrative.<\/p>\n
\u201cBy investing in shares around the world, we are insulated against any one economy doing badly,\u201d he said.<\/p>\n
Jonathan Greer, head of retirement policy at wealth manager Quilter, said trustees that manage pension schemes are required to seek the highest returns for their members, which has \u201cled to a significant globalisation of investment\u201d in recent years.<\/p>\n
So far, the Government has said it wants to encourage more UK investment rather than make it mandatory, which Greer said would be a step too far that would provoke backlash from providers.<\/p>\n
\u201cTheir concern is that UK market historically has underperformed,\u201d he said.<\/p>\n
He added that the success of the Government\u2019s plans will come down to whether trustees can see value in the UK market.<\/p>\n
Rob Yuille, head of retirement policy at the Association of British Insurers, a trade body that represents many pension firms, said savers\u2019 interests \u201cmust come first\u201d.<\/p>\n
\u201cGovernment has consistently said it has two objectives, one of which is savers\u2019 interests, and the other of which is UK growth,\u201d he said. \u201cThey can go hand in hand, but firms will invest on the basis of what is in their customers\u2019 best interest.\u201d<\/p>\n
Yuille said there is \u201csome debate\u201d about the extent to which the reforms would provide greater returns for savers.<\/p>\n
\u201cPart of the reason why firms are not invested in certain assets is that they are risky,\u201d he added. \u201cThe scope of returns is higher, but they might cost more.\u201d<\/p>\n
The risks of megafunds and infrastructure investments<\/p>\n
Infrastructure projects in the UK are risky for investors partly because they are beset with delays, cost overruns and cancellations by subsequent governments, Greer said.<\/p>\n
Shortages in engineers and skilled trades could also make it more difficult to get such projects completed.<\/p>\n
Greer believes the Government\u2019s planning reforms and removal of \u201cred tape\u201d are part of its attempts to make investing in UK infrastructure more attractive. <\/p>\n
Infrastructure investments are also difficult to sell quickly, which can pose a challenge for pension schemes because they need to be able to give cash back to savers on a regular basis.<\/p>\n
Having bigger pension schemes should help with that \u2013 the bigger the pension scheme, the more money they have to balance out infrastructure investments with other, more easily saleable options, Greer said.<\/p>\n
But the Government\u2019s plans to make pension funds a minimum size have other drawbacks that could hurt consumers.<\/p>\n
Webb said the pensions market could end up dominated by a \u201csmall number of megaliths\u201d that \u201call do much the same thing\u201d, which leads to a lack of competition and innovation.<\/p>\n
Yuille agreed that this was a concern that needed to be addressed. \u201cThere needs to be a way in for someone who wants to do things differently,\u201d he said.<\/p>\n
In a consultation response seen by The Telegraph in January, senior bank bosses from Barclays, NatWest, Lloyds Bank, Nationwide and other large firms warned that creating megafunds risked harming innovation and leading to a \u201cone-size-fits-all that does not meet the needs of individuals\u201d.<\/p>\n
The projects that could be targeted<\/p>\n
Investments in the UK that could be targeted by politicians are expected to include long-term infrastructure such as building roads, railways and wind farms, Selby said.<\/p>\n
\u201cHigh-growth potential industries of the future\u201d, such as life sciences and artificial intelligence could also feature, he added.<\/p>\n
Some pension funds already invest in renewables, such as wind farms, as well as residential and commercial housing projects including build-to-rent, student accommodation and homes for sale, Yuille added.<\/p>\n
Investing in the energy grid is another option.<\/p>\n
\u201cThe obvious thing would be the move to a decarbonised energy grid,\u201d said Webb. \u201cIf we think burning gas isn\u2019t for the long term, then all our cars have to be electric. Home heating has to be hydrogen or electric. <\/p>\n
\u201cWe all need home heat pumps and solar panels, and the grid needs to be completely rewired to get power from the offshore wind farms in Scotland, to where the actual power is needed.\u201d<\/p>\n
Other projects the current Government has indicated it wants prioritised include battery gigafactories, green hydrogen and green ports, he added.<\/p>\n
To make infrastructure investments more attractive, the Government is looking at offering guarantees to offset risks, co-investing with public money and changes to make projects comply with regulations, according to the Association of British Insurers.<\/p>\n
One option is for infrastructure firms to issue debt, borrow money from pension schemes and pay them interest, Webb said.<\/p>\n
A second is for pension funds to invest directly, sometimes in partnership with government agencies such as the British Business Bank. <\/p>\n
Pension funds could band together with other investors to form a consortium to invest money into projects and own them directly. <\/p>\n
Alternatively, pension funds could buy shares of firms.<\/p>\n
In 2023, the previous Conservative government said it wanted pension schemes to invest five per cent of their default funds in unlisted equities \u2013 investments in companies that are not publicly traded on a stock exchange. This would be aimed at start-ups, Webb said.<\/p>\n
\u201cA lot of them fail,\u201d said Webb. \u201cThat doesn\u2019t mean they\u2019re bad things for pension schemes to invest in, but it means that they need a breadth of investments, so across different sectors, for example biotech startups and green energy start-ups and AI start-ups.<\/p>\n
\u201cYou\u2019d want mechanisms that enable pension schemes to invest across, say, 100 startups recognising that 50 of them might fail, but one might be the next Microsoft.\u201d<\/p>\n
Bundling companies together could also make it cheaper for pension funds to invest in start-ups by saving them from having to individually research and analyse specific firms to pick winners, he added.<\/p>\n
Another pension reform proposed could backfire and make investing in UK start-ups even less attractive, however.<\/p>\n
The Government plans to assess the \u201cvalue for money\u201d provided by pension funds, which is designed to help savers compare schemes by taking into account returns and costs.<\/p>\n
This could discourage pension funds from investing in UK start-ups because they tend to lose money in the first few years, Webb said.<\/p>\n
\u201cThere is a real risk, and this is a risk the Government may make worse, that schemes won\u2019t do this kind of thing because they\u2019re being measured on their performance over one year, three years, et cetera, and that\u2019s a disincentive to invest in something that has only a long-term payback,\u201d Webb said.<\/p>\n
Yuille agreed, adding: \u201cConcerns have been raised about firms just not wanting to be at the bottom. So there\u2019s a herding effect \u2013 a desire to be in the pack rather than take risks.\u201d<\/p>\n
How Australia and Canada compare<\/p>\n
The Government has said its plans to create pension megafunds \u201cmirror set-ups in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential\u201d.<\/p>\n
However, experts said the UK plans have significant differences.<\/p>\n
Australia offers pension schemes a big tax break if they buy Australian shares, which is not in the UK\u2019s plans.<\/p>\n
\u201cMinisters point to Australia and say, \u2018Oh, look, they invest all in the home economy,’\u201d said Webb. \u201cWell, they do partly because they\u2019re bribed with public money to do so. We don\u2019t do that.\u201d<\/p>\n
The costs of such tax breaks would be huge, given that pensions are a multi-trillion pound industry. <\/p>\n
Although they invest in more Australian stocks, savers \u201cdon\u2019t necessarily do that much better, partly because the costs of the Australian system are higher\u201d, Webb added. <\/p>\n
Australian pension schemes also spend a lot more money on marketing to persuade people to choose their scheme, he said.<\/p>\n
Australian funds are also much bigger because employers have to pay pension contributions worth 11.5 per cent of wages, Yuille said. In the UK, employers must contribute 5 per cent and employees pay another 3 per cent.<\/p>\n
Canada has large-scale pension funds that invest in more infrastructure projects, but only a small proportion of their money is invested in Canadian infrastructure or Canadian firms, Greer said.<\/p>\n
The Canadian government is developing its own proposals to try to get increased investment in its economy.<\/p>\n
\u201cCanada is probably wrestling with the sort of problems that we ourselves are wrestling with,\u201d Greer.<\/p>\n
In other countries, moving away from domestic investment in favour of a global strategy has proved to be more lucrative for pension funds and their savers.<\/p>\n
South Korea has been shifting the investment strategy for its National Pension Service to focus on acquiring more global investments, which have fuelled rising returns.<\/p>\n
In 2024, the fund posted a record 15 per cent return, with a 34 per cent return on its global stocks, followed by 17 per cent on global bonds and alternative investments, The Korea Herald reported. Returns were 4.5 per cent in 2015 and 10.7 per cent in 2019.<\/p>\n
Global stocks made up 35.5 per cent of its assets in 2024, up from 23.1 per cent in 2020. An additional 7.3 per cent was invested in global bonds last year. The fund plans to raise its overall global assets to 60 per cent by 2028.<\/p>\n
A Government spokesperson said: \u201cCreating wealth and driving growth is at the heart of our Plan for Change. That\u2019s why it was a priority for the Government to launch our landmark pensions review and announce a new Pensions Bill which could boost a defined contribution pot by over \u00a311,000 in the first King\u2019s Speech of this Parliament.<\/p>\n
\u201cDriving greater scale in pensions funds to deliver fewer, larger and better pension funds will maximise opportunities and provide greater security for those saving for their retirement, as well as driving greater investment into the UK to deliver economic growth.\u201d<\/p>\n
\nInside the pensions crisis<\/strong>\u00a0<\/p>\n
The i Paper\u00a0brings you the essential stories on what went wrong with pensions, along with expert insights into the policies and solutions that could help secure your financial future.\u00a0<\/p>\n
Teachers blocked from swapping big pensions for higher wages.\u00a0<\/strong>A trust of nearly 100 schools planned to offer teachers the chance to take home higher pay in return for smaller pension contributions from April, but has been stalled after a Government intervention.\u00a0Click to read.<\/a>\u00a0<\/p>\n
Why the state pension triple lock is closer\u00a0to being axed than you think<\/strong>. Labour MPs are starting to go where few politicians fear to tread \u2013 discussing reform of the state pension triple lock.\u00a0Click to read<\/a>.\u00a0<\/p>\n
Triple lock state pension is broken \u2013 here\u2019s\u00a0how to fix it<\/strong>. Sir Steve Webb, the former pensions minister, says every political party wants to get rid of the triple lock.\u00a0Click to read.<\/a>\u00a0<\/p>\n
I\u2019m famous and I\u2019ll never be able to afford to retire.<\/strong> I now put 20 to 25 per cent of my earnings into the pension, writes Lucy Porter. Click to read.<\/a><\/p>\n
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How your pension is at greater risk from scammers than ever before. <\/strong>Experts believe there could 10,000 victims of pension fraud this year as household incomes become increasingly strained and people look for ways to unlock cash. Click to read.<\/a><\/p>\n
How Reeves\u2019s plan to boost UK investment using pensions could cost you thousands. <\/strong>The Chancellor\u2019s push for more UK investment by pension funds puts savers\u2019 money at risk, experts warn. Click to read<\/a>. <\/p>\n