Britain’s government wants bigger pension funds

Over theLGPSLGPSLGPSLGPSLGPSISA past decade of political turmoil, few goals of government policy have been quite so consistent as that of rationalising the country’s mish-mash of pension schemes. In a speech in the City of London on November 14th , the chancellor, announced plans to consolidate local government pension schemes (s) into “megafunds”. Back in 2015 George Osborne, a previous chancellor, inaugurated his own push to merge them into “British wealth funds”.Such proposals do tackle a genuine problem. is the world’s third-largest by assets but has an unusually fragmented system. A proliferation of smaller schemes means duplicated management costs. Larger funds have economies of scale for hiring pricey in-house expertise, which is especially important for unlisted assets like private equity, venture capital or infrastructure.Prior governments made some progress. Mr Osborne’s reforms created “pools” to help centralise the management of assets. By March 2022, though, only 39% of assets had been transferred to these pools. Another 31% was managed by the pools but remained under ownership. Last year Jeremy Hunt, Ms Reeves’s immediate predecessor, set a deadline of March 2025 for all funds to transfer their assets to the pools; she has now promised new legislation to force that through. She also announced plans, which might prove even more consequential, for consolidating defined-contribution pension schemes that will cover the bulk of future pension savings.The main winners from these reforms, if they are done well, should be pension savers. They would benefit from more competent portfolio management and lower fees, which ought eventually to translate into faster-growing retirement savings. Over the past decade pension schemes in Britain have performed a little worse than those in peer markets like Canada or Australia. Ms Reeves’s reform agenda is the right one to help close that gap.But successive chancellors have taken such an interest in pension consolidation for another reason, too: to use pension savings to boost investment and unlock growth in Britain. In her speech Ms Reeves lamented that “more often than not, it is Canadian teachers and Australian professors reaping the rewards of investing in British productive assets through their pensions schemes, rather than British savers”. These reforms, she promised, “will deliver real change in our economy”.This is a less persuasive pitch. British pension funds do make up a very small share of the investor base for British assets (see chart). But an underallocation to British companies and projects is not the reason for their underperformance. Quite the opposite. British asset markets have lagged behind global benchmarks; British pensions would have done even worse without diversification. If anything finance textbooks would counsel underweighting of domestic assets; savers already have plenty of inescapable exposure to the local economy via their salaries, property and so on. No need for even more.If pensions do choose to increase their British investments, that could give domestic capital markets a boost; foreign investors are likelier to encourage startups eventually to incorporate or list abroad. Redirecting billions of pounds of pension cash might also nudge down the cost of capital for a few British firms. But the City of London is among the world’s best-developed financial centres, with access to plenty of foreign capital. For sufficiently compelling investment opportunities, financing is not likely to be the bottleneck.Both main political parties have made occasional noises about incentivising or compelling more domestic investment. In his final budget Mr Hunt set up a “British “ to extend tax breaks for retail investors buying British stocks; Ms Reeves, sensibly, shut that down. But Emma Reynolds, the pensions minister, recently hinted to the that if the new megafunds don’t choose to ramp up British investments, they could be forced to. That would be precisely the wrong way round. The British economy needs reforms to make it easier to build, hire and export. Do that and there will be no shortage of capital, whether domestic or foreign.