Rachel Reeves faces a sober warning: hands off our pensions

Editorial: Politically, the government cannot afford to lose the trust of the voters – nor the confidence of business

Rachel Reeves is not the first hard-pressed chancellor of the Exchequer whose gimlet eye has alighted upon the nation’s vast pension funds as a way of, in the words of the latest Treasury briefing, “unlocking billions of pounds of investment in exciting new businesses and infrastructure and local projects”.

When the word “exciting” is used by politicians in the context of people’s pensions – other people’s money – then we should reach for our wallets. Although the plans are still being developed, according to her Mansion House speech, what is already perfectly clear is that this chancellor is unable for all practical political purposes to tax and borrow much more.

The slightly jittery reaction of the markets to her Budget was evidence enough of her limited room for manoeuvre. Therefore, she has to find the funds for much-needed investment from some other source. “Has to”, that is, because without a substantial boost to investment soon there is very little chance of the government lifting the UK’s anaemic rate of economic growth and thus fulfilling its ambitions to raise living standards and to improve public services. That, in turn, will determine whether the Starmer administration manages to last for more than one term in office.

The value of these collective pension pots is measured in the trillions rather than billions of pounds. The temptation to take a nibble is great, and seemingly irresistible. Indeed, a figure of some £80bn to be unlocked “for infrastructure projects and businesses of the future” is explicitly mentioned, easily enough to pay for the old Green New Deal and various other laudable schemes. Exciting stuff.

The chancellor’s vicarious appetite for risk extends across the financial services sector. She also thinks, with no obvious evidence adduced, that the safeguards put in place after the global financial crisis are no longer appropriate: “The UK has been regulating for risk, but not regulating for growth.” She also therefore has a plan to rebalance the system, setting the financial services sector up to innovate, grow and “seize the opportunities for investment in businesses, infrastructure and clean energy across Britain”.

The assumption here is that the country really is teeming with “just add cash” projects ready to level up communities and transform UK growth prospects. Yet with ever higher tax burdens for business, labour shortages, and more onerous employment legislation, the climate for business investment has grown more inclement.

The idea is that a consolidation of, for example, the many smaller local authority pension funds, will create “megafunds” similar to those that exist in Canada, Australia, California and other jurisdictions – and, in turn, that opens up the opportunity to invest in a wider range of assets.

Only this week, for example, a Canadian pension fund bought three UK airports for £1.5bn – and, in principle, those potentially lucrative enterprises could have been acquired instead by a British megafund. The larger the fund, the greater the scope for it to behave more like a private equity investor – and to take a punt on higher-risk (but higher-return) ventures.

The danger, however, is equally obvious – which is that the pension funds are directed to invest some arbitrary quota of their total funds in UK assets, aside from “safe” gilts and the highest grade corporate bonds and equities. That approach carries with it the real danger that politically useful projects are prioritised above more promising investments, either at home or abroad. State-of-the-art immune therapies based in Britain might be a great place to put your money – but that’s a matter for fund managers and trustees to assess on the merits, and not through the Treasury making them do so.

This effective appropriation of pension funds is legally dubious and in any case not acceptable – especially when the members of these funds are not properly consulted about the diversion of the money they need from their old age into “exciting” but ultimately failed schemes. Pension schemes should have one clear, overriding goal: maximising members’ retirement incomes through maximising risk-adjusted returns.

If these are to be found in the UK or India or America or elsewhere is purely a matter for the trustees, the members, and the regulators. Pensions exist to support members’ retirements, not to serve economic or political objectives, “exciting” or not.

There are many other detailed (but important) issues facing the pension industry, such as how to manage defined benefit schemes reaching the end of their spans – and there is much benefit to be gained in careful reforms that help protect pension pots and raise overall returns. There is no justification for the state to intervene in the way fund managers allocate their assets, for obvious reasons; and any attempt to do so deserves to be punished at election time.

If pensioners lose their main income in retirement because Ms Reeves has directed it into some duff project, then the legal as well as the political consequences would be incalculable.

If the government really does want to push pension savings into whatever UK sectors it would like to see developed – and is so confident of the “exciting” returns on offer – then the only fair way to do so is to issue a Treasury-backed guarantee that investors will not lose money and, indeed, will benefit from a yield in excess of a 10-year gilt.

Politically, the government cannot afford to lose the trust of the voters, nor the confidence of business. It is true that it has inherited a grievous mess in the public finances and deep-seated economic weaknesses, not least as a consequence of Brexit. Fixing the foundations is indeed an arduous and expensive task, but that cannot be done by, in effect, devaluing working people’s pensions, as well as their wages. Hands off.