Labor willing to force pension plans to invest in £50bn ‘growth fund’

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Labor is set to force pension funds to invest in a proposed £50bn ‘future growth fund’ as the party aims to increase the amount of capital available to fast-growing UK companies.

Rachel Reeves, shadow chancellor, said she did not think Labor would need to impose pension schemes to invest in the new fund due to goodwill in the sector, but added: “Nothing is off the table”.

Speaking to the Financial Times during a three-day visit to the US, he said he also wanted to speed up the merger of smaller UK pension funds so as to consolidate a fragmented market.

Reeves, who visited the New York Stock Exchange on Monday, said he wants to change the culture of Britain’s savings industry by freeing up domestic funds that could persuade British companies to list in London.

He also wants pension funds to work with the state-owned British Business Bank to improve the UK’s ‘start up, scale up’ landscape, with Labor warning that the country is trying to do “capitalism without capital”.

Reeves said: “Lack of confidence in the British economy has led too many companies to leave our shores.”

Jeremy Hunt, chancellor, grapples with the same issues and is expected to present his own proposals for channeling more of the UK’s retirement savings into higher-risk ventures in his Mansion House speech in July.

In New York, Reeves will meet with business leaders and political strategists including Joe Biden pollster John Anzalone and former Barack Obama adviser David Axelrod.

He will then travel to Washington to meet with figures in the Biden administration and will also deliver a speech in the US capital setting out Labour’s economic vision for the UK.

Reeves has backed the proposal by Nicholas Lyons, mayor of the City of London, to create a £50bn growth fund, with 5% of the assets of each defined-contribution scheme invested in it.

Lyons said pension schemes should be forced to contribute to the fund, and Reeves said she was open to the idea, although she believed the goal could be achieved on a voluntary basis.

The Pensions and Lifetime Savings Association, a trade body, said so last month he opposed any move to take away full investment freedom by pension plan trustees.

Reeves wants to enhance Britain’s economic growth potential by consolidating Britain’s highly fragmented pension market – with around 28,000 defined-contribution pension schemes – along Canadian or Australian lines.

The UK government is already pushing for market consolidation, although progress has been slow.

Smaller pension schemes with assets of £100m or less and performing poorly against other funds for investment returns and expenses are expected to liquidate or merge, and the Pensions Regulator has been empowered to force consolidation.

Reeves’ plans would push smaller pension funds to merge to create the size needed to take on new investments and would include giving the regulator more powers to consolidate the sector.

The shadow chancellor said he believed pension schemes with less than £200m in assets could be failing in their fiduciary duty to savers. “It’s hard to see how some of the smaller funds are offering value for money,” he added.

Reeves argues that some UK companies eventually move overseas because they have had problems attracting domestic funding at an early stage.

Average allocation to UK stocks by UK defined benefit pension schemes it’s fallen from about 50 percent in 2008 to about 10 percent today, according to data from the Pension Protection Fund, the body that acts as a safety net for retirees when companies go insolvent.

Labor points to high-profile companies, including UK-based chip designer Arm, that have announced plans to list in New York.

Meanwhile, Labor would create a framework for pension funds to invest in promising new businesses alongside the British Business Bank, which would carry out the relevant due diligence.

Reeves supports Hunt’s plan to reform EU-era Solvency II rules, intended to pave the way for funds to invest in infrastructure projects, but said: “They’ve been talking about it long enough – they have to.”

Andy Briggs, chief executive of Phoenix Group, the insurer, said there was an “exciting opportunity” for companies in the sector to invest in a broader range of assets with an “attractive long-term return profile”, but he added that having a pipeline of opportunities is crucial.