Is Reeves right to gamble with our pensions to boost the economy with ‘megafunds’?

The chancellor hopes to free up £80bn for investment with her pensions revolution. But in chasing the big bucks, James Moore asks, is she forgetting the interests of ordinary people paying into pension schemes?

When a government launches a “big idea” in a wave of hype, my stock response is this: be afraid. Be very afraid. Especially when it involves pensions, a field that has created more potholes than a typical British B-road at the end of an icy winter.

This brings us neatly to pension “megafunds”, Rachel Reeves’s big idea for unlocking the cash for the investment that the UK so direly needs. Chronic under-investment is a problem that has plagued the UK economy for years, especially when compared to its chief competitors. The chancellor deserves credit for recognising that and for attempting to find solutions.

But do the billions of pounds held by the nation’s pension funds represent a good one? Creating super-sized funds in the hopes that they will invest in the British economy isn’t a new idea. It was under consideration by the Cameron administration; Jeremy Hunt was looking at doing more with it, too. But it is fair to say that Reeves has lit a fire under it.

At tonight’s annual Mansion House dinner, an audience of City suits and other worthies will hear about how she plans to keep it burning bright via next year’s Pension Schemes Bill. Her megafunds will be created by pooling assets from the 86 separate local government pension schemes, which offer members guaranteed payouts when they retire.

She also plans to force the consolidation of the “defined contribution” plans most of us working in the private sector are stuck with. The risk with these is taken by the saver. What you get depends on how much you put in and how your scheme’s investments perform after charges. The one unequivocal benefit from the creation of the chancellor’s bigger funds is that they should reduce those charges because they will benefit from economies of scale.

That scale is also what Reeves hopes will encourage them to put their funds into riskier plays – what the Treasury describes as investments in “exciting new companies with higher growth potential”. It might just be me, but I always worry when I see government departments gushing about “excitement”.

Rachel Reeves is hoping our pension savings can be used to boost the economy (Getty Images)

Have you spotted the problem yet? It is quite true that if some of their riskier investments in UK plc turn sour, big funds should have the financial cushions to be able to weather the losses while still meeting their obligations. That, at least, is the theory. Tom McPhail, the director of public affairs at consultancy Lang Cat, who has worked in financial services for 18 years, also agrees that bigger funds should mean better value for members. However, he says: “The growth agenda and investing in the UK economy aspect of government’s plans are more problematic. The government still has to make the case it is in members’ best interests for trustees and administrators to go along with their plans.”

That right there is the £80bn (the figure bandied around for the amount these plans could unlock) question: is this in scheme members’ interests? Can trustees, who have a fiduciary and legal duty to those members, be expected to play along?

If they do and it all goes swimmingly, if a good chunk of the investments Reeves wants schemes to make in her “exciting new businesses” with their “growth potential” and in “critical infrastructure” to boost the British economy come good, then great. No one will remember the Jeremiahs like me saying, “Have a care because if this blows up, it’s going to hurt a lot of people who aren’t City suits and might not like the idea of taking a trip to the infrastructure bookie with their savings.” I imagine the chancellor would point to Canada and Australia. They have their own megafunds, which do a lot more investing in their economies than our pension funds do at present.

But my concerns remain because I’ve been around pensions for a long time. One thing you get to know about this sector is that it produces more scandals, skullduggery, cock-ups, and general financial services ickiness than it really ought to.

If you look at the root cause of most of those scandals, you tend to find the same thing: failure to put the interests of the pension saver front and centre. Often, it’s the pension providers at fault, sometimes, it’s the sponsoring employers. Dodgy advisers – the sort that a friend and I like to refer to as shiny-suited pension thieves – are also too frequently in the mix.

This time it is the government preparing to take chances with people’s savings in pursuit of its “growth agenda”. This is certainly a more noble goal than a salesman helping themselves to people’s meagre savings. But it could prove just as problematic if things go wrong.