Looking in the mirror in the morning forces me to confront two divergent but equally true propositions: (1) at age 57 it is unlikely that I will ever play professional football for Tottenham Hotspur; and (2) I have been involved in the pensions profession long enough to have seen the ideas of politicians to use pension funds to stimulate the economy come and go, several times.

As regularly as any Chancellor sets out their budget for the year, so come the rumours of harmonizing the level of tax relief on contributions and scrapping tax free lump sum facility. Both of which carry big numbers in terms of revenue for the Exchequer and both of which have the same chance of coming to fruition as the aforementioned Tottenham Hotspur winning the ‘Treble’. Why? Partly because the work needed to reform the tax regime would be significant. But mainly because the electorate see such plans for what they are, smash and grab raids on one of the few long-lived financial success stories in the economy.

More recently the allure of pensions cash to the Government of the day, as well as the Government in waiting, is being perceived differently. Politicians staring forlornly at the decades-long lack of growth in the UK economy now view the £2.5trn ($3.1trn) of UK invested pension funds as a golden goose.

It is becoming conventional wisdom that pension scheme funds should simply be available to the Government to stimulate economic growth.

The latest thoughts, this time from the opposition Labour Party, are to ‘compel’ defined contribution schemes to invest in growth funds and start-up funds, perhaps to the tune of 5% of assets per scheme.

It is becoming conventional wisdom that pension scheme funds should simply be available to the Government to stimulate economic growth, but surely that is lazy thinking? It is the classic politician’s syllogism – we need to find some money to stimulate growth … pension schemes have money … pension schemes should stimulate growth.

Well here are a few reasons why this is generally a bad idea.

Golden goose

Firstly, if you have a golden goose, don’t kill it. Pension schemes are the success story of the UK economy and have been for the last half a century. Some 22.7 million people are currently saving for their retirement in a workplace pension. Their investment already stimulates the markets and, when they retire, their disposable income spending and non-reliance on State benefits stimulates consumer demand.

Currently only around 10% of workers who are auto-enrolled into their workplace pension scheme decide to opt out. But pressure is mounting in the midst of the cost of living crisis and, with the general public’s faith in financial institutions at another low, who would want to see a compulsion to invest in start-up or growth funds, knowing the risk they carry?

Defined contributions pension schemes are fairly simple beasts. If investments do well, so your pension purchasing power goes up. If investments do badly, the opposite is true.

Can we seriously contend that people are champing at the bit to stimulate economic growth with their hard-earned savings?

Currently, around 95% of members of defined contribution pension schemes join the default investment fund and stay in it until they retire. In doing so, they are protected by a cap on investment charges of 0.75% of funds under management. The new world thinking is to allow schemes to increase or remove charging caps to facilitate investment of scheme funds in growth, start-up and infrastructure projects.

Can we seriously contend that people are champing at the bit to stimulate economic growth with their hard-earned savings, knowing that no one, not employer nor Government will stand guarantee should their schemes lose money, and that they will be expected to pay greater charges for the privilege?

Secondly, many previous Governments’ track records with pensions reforms are poor. Generally, legislation heaped on legislation over the years has made it impossible for all but the hardened pension professional to understand the differing entitlements for different tranches of pension scheme savers.

Significant misstep

But by way of specific example, the former Chancellor Gordon Brown made an admittedly rare but nonetheless significant misstep in 1999. Again concerned with the need to refocus employers away from making dividend payments to shareholders and towards making investment in their businesses to the economy, the credit against Advance Corporation Tax from which pension schemes benefitted was removed.

The result? There was no perceivable refocus on employer investment but the value of defined benefit pension schemes’ assets, measured against their liabilities, fell sharply. Combined with increasing mortality rates, the removal of ACT tax credit sent schemes into funding deficits from which it took them the best part of two decades to recover.

The irony is that now that pension savings are increasing, a similar idea, albeit with different focus, is being mooted.

Thirdly, there is a clear conflict between what the politicians seem to be saying and the messaging from the Pensions Regulator (“Regulator”) to pension scheme trustees. In specifically focusing on value for members in defined contribution pension schemes, the Regulator’s guidance says: “We expect trustee boards to make efforts to understand the characteristics of their members and, where possible, their preferences and financial needs, and to take this into consideration when exercising their judgement about what represents value for members. This includes taking into account characteristics such as the demographic and, where possible, the salary profile of the membership.”

The Regulator’s watchwords to all pension schemes’ trustees are risk-management and caution. How will this guidance be measured against any compulsion on trustees to invest in, by definition, high-risk ventures?

Trustees’ first duty must be to pension scheme members and the need to act in their best interests. The Regulator’s watchwords to all pension schemes’ trustees are risk-management and caution. How will this guidance be measured against any compulsion on trustees to invest in, by definition, high-risk ventures with the focus on economic growth generation, perhaps at the expense of pension scheme members’ benefits?

That of course is without mentioning the ever increasing regulation on pension scheme trustees managing transition to net zero.

A way forward?

To misquote The West Wing, let pension schemes be pension schemes.

First and foremost, schemes must be able to provide at least the level of pension that members are reasonably expecting and for which they have made contributions. Start with that as the base and build in any drive to invest in growth with the duty to members as a bedrock.

Then, improve the education piece around ESG and growth asset investment to lead, not force, scheme members into investing in options other than their default fund.

Provide a centralised guarantee to scheme members who support start-up funds or investment in growth. Rightly or wrongly, people see the State as having a poor record of managing infrastructure projects and see start-ups as two people designing an app in their garage, with very few going on to be a Gates or a Jobs. Scheme members will need convincing that such investment won’t ruin their retirement.

Finally, perhaps our politicians could spend a little more time working out how and why our economy’s growth is so poor, before trying to use pension funds to solve the problem.

The Shadow Chancellor said last week that the UK “… used to be competitive”.  One thing is for sure, that competitiveness didn’t come from persuading pension funds to back start-up, growth and infrastructure projects. I wonder where it did come from?