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When Otto von Bismarck introduced the world’s first pension system in 1889, he could hardly have imagined the colossal wealth that people would one day save towards retirement. Britain’s pension funds look after a collective £2tn, almost as much as the country’s annual economic output. Rachel Reeves wants them to invest this money in regenerating decrepit infrastructure. The rationale for the chancellor’s proposition is clear. So too are its flaws.
Ms Reeves will announce the full details of her plans this week. Her austere fiscal rules have given them a new urgency. Investment in Britain lags behind other G7 countries, and the government has been attempting to use other people’s money as a substitute for more generous public spending. She hopes that retirement savings could provide a source. She has praised Canada and Australia’s pension funds, which plough money into infrastructure at home and abroad, and wants Britain’s smaller, sleepier funds to emulate this model.
Her instincts are understandable. Only 20% of the assets held in Britain’s defined contribution pension funds are now invested in the UK. Many funds have instead gravitated towards the US market to take advantage of rising tech stocks. This is a missed opportunity. British pension funds should be investing in Britain for the simple reason that most of their beneficiaries live here. Doing so could also help protect people’s retirement savings from currency fluctuations, and may become increasingly necessary if Donald Trump continues detonating the American stock market.
Even so, Ms Reeves’s plan for a more national pension system rests on flawed foundations. She hopes that funds will invest more money into private markets that are dominated by asset managers. Many of these specialise in infrastructure, but they also charge steep fees, and there is growing evidence that their performance doesn’t justify their huge expense. Even the World Economic Forum – hardly known for its radicalism – has observed that the private capital industry is organised so fund managers capture most of the profits. Britain’s pensions system is already highly unequal, and many people, particularly women and minorities, have very poor cover. Pressuring funds to invest with financial middlemen who transfer a growing share of pensioners’ money to themselves would be a mistake.
True, Ms Reeves has already proposed a partial solution: merge some funds so they’re large enough to hire their own in-house professionals and skip these fees, as many Canadian and American funds already do. But there’s still a bigger question about whether the Canadian approach is the right one to emulate. One only needs to witness the disastrous example of Thames Water, whose largest investor was the Ontario Municipal Employees’ Retirement System, to see how this model of infrastructure investing can result in rent-seeking that degrades the public realm, even if some retirees benefit.
A better option would be allowing Labour’s national wealth fund to issue its own bonds. These would sate pension funds’ existing appetite for gilts and give the government greater control over investment. Most pension funds are extremely risk averse, and many don’t want to invest in infrastructure until it’s already built. Where this is the case, the government should be borrowing to fund such projects itself. It is worth remembering, after all, that an aversion to public investment was to blame for the ailing state of Britain’s infrastructure in the first place.
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