What are superfunds? Investing Explained

In this series, we break down the jargon and explain a popular investment term or theme. Here they are super funds.

What are these?

Superfunds are the focus of the latest big idea to revive the economy. The proposal comes from the Tony Blair Institute for Global Change, the think tank founded by the former prime minister.

Under a plan unveiled this week, thousands of UK pension funds would merge into about six ‘global’ superfunds, each worth around £300bn to £400bn.

These would invest in British business and infrastructure.

Why do we need such funds?

The aim is to benefit pensioners and boost the UK economy. UK pension funds no longer hold substantial holdings in UK companies, cutting off the supply of capital vital to funding innovation and improving the country’s productivity.

It has also hurt UK company share prices, which is why more and more companies are trying to leave London and list on Wall Street instead.

Which pension schemes would it concern?

About 4,500 of the smallest corporate pension plans (where benefits are guaranteed) would have the opportunity to merge with the Pension Protection Fund (PPF) to create a GB Savings One fund.

This model would be rolled out taking into account the remaining defined benefit plans, defined contribution plans (where payouts depend on investment performance), local government plans and public sector plans, which are mostly unfunded.

Also included would be Nest, the National Employment Savings Trust, which covers workers in auto-enrollment plans.

Currently, the PPF operates a lifeboat for programs whose sponsoring companies have gone bankrupt. The role of the body would of course be expanded enormously.

Are current politicians in favour?

The proposals reflect growing enthusiasm for superfunds in Whitehall and Westminster. The Productive Finance Working Group, which includes the Bank of England, the Treasury, the Financial Conduct Authority and some major fund management groups, has been investigating the issue since 2020.

Chancellor Jeremy Hunt is keen to find a way to free up private pension capital to revive the economy. Labour’s Rachel Reeves, the shadow chancellor, supports the creation of a £50bn Future Growth fund in which each DC scheme would be forced to divert 5 per cent of its assets.

Should we be excited or extremely worried?

Don’t be afraid of an instant robbery of your savings – superfunds are far from becoming a reality. Opinion is divided on the plan, and not just because some people are instinctively suspicious of any policies proposed by Blair.

Some critics point to the damage done to pension plans by his administration’s dividend tax credit changes.

What are the main objections?

There are many questions. Can pension plan participants have confidence in the government’s ability to direct the investment of cash to stimulate the economy and provide the highest possible long-term benefits?

Do participants in the scheme have the right to control how their savings are spent?

What level of remuneration do fund managers expect for their role? Will there be payment for failure, or just success?