ALEX BRUMMER: Fear of risky investments harms Britain

Freeing up Britain’s pension funds for a revolution aimed at supporting riskier investments, such as venture capital, technology startups and the bottom end of the stock market, should have happened decades ago.

Brexit may have fueled thinking in government, at the Treasury and in the city, but the horse bolted long ago.

It is shameful that British pension funds, once at the forefront of equity investing, have pulled up the drawbridge and hold just 2 percent of FTSE 350 shares.

Jeremy Hunt is determined to free up some of the £1.28 trillion of funds held in defined contribution schemes (where returns depend on performance) for breakthrough investments.

Ideally, it would also be possible to use defined benefit plans, where the pension benefits are effectively guaranteed. But that is much more difficult. Since 2001, when the Bootsfonds switched completely to government bonds, there has been a rush in the same direction.

The £4.8 billion Boots scheme has just become the largest corporate scheme to be freed from the ultimate corporate sponsor (US owner Walgreens) and bought by insurer Legal & General.

This year alone, L&G has added £13.4 billion in pension transfers – both in the UK and abroad – to its books.

Such buy-ins shift any risk from sponsoring companies to the insurer. Letting go of the pension fund also removes a poison pill that could make it easier for Walgreens to divest Boots as the company refocuses on U.S. health care.

A series of moves by government and regulators has hastened the decision by those managing the assets of defined benefit plans to switch from shares to bonds, ending a golden age for workplace pensions in Britain.

Labor’s withdrawal of a tax break on dividends paid into company pensions saw many defined benefit schemes downgraded from surplus to deficit.

This trend was accelerated by stricter regulations and rules after the financial crisis that required all financial institutions to hold more bonds.

Ambition: Jeremy Hunt determined to release some of the £1.28 trillion of funds held in defined contribution schemes

In this week’s far-reaching Autumn Statement, Hunt declared an ambition to release an additional £75 billion annually to finance high-growth businesses by 2030. It is a huge task to get there on a voluntary basis.

One of the first steps is to consolidate the tens of thousands of small defined contribution funds into an actively managed Australian-style pension fund.

Many workers in Britain are little aware that they are automatically joined to pension schemes and have no idea how the pots are managed.

Paradoxically, after defending workplace pensions in its last term, Labor is now seeking new powers. Shadow Chancellor Rachel Reeves wants the pensions regulator to help merge defined contribution schemes and direct investments in growth companies.

In the Autumn Statement, Hunt proposes a variation on the same approach. He suggested that funds in the Pensions Protection Fund, the standard £40 billion savior to insolvent companies’ schemes, could be used to support adventurous investment, along with pooled plans from local authorities.

Both Hunt and now Reeves recognize the defensive approach to saving and investing by all parts of the huge UK pensions sector. But there are major obstacles to change. Encouraging consolidation is like herding cats.

There are large vested interests involved, including the consultants, actuaries and fund managers who collect multiple fees from a divided client base.

One estimate suggests that bringing together local government plans alone could free up up to £1 billion for aid to Britain.

Then there are the layers of supervisors. Freedom from Solvency II, the rulebook imposed by Brussels, should have been a silver bullet.

But last year’s blowout in the market for obligation-based investments (LDIs), derivatives built on gilt-edged stocks, has left regulators terrified.

The Bank of England, the City enforcer, the Financial Services Authority and the Pensions Regulator are behaving like nervous ninnies, afraid of the wrath that will befall them if something goes wrong.

A succession of bad experiences dating back to Robert Maxwell and the plundering of the Mirror Group’s pension fund has made them overly cautious and resistant to change.

Hunt and his successors have a huge task to overcome cultural risk aversion. Lessons should be learned from the US, where red-in-tooth-and-claw capitalism thrives on risk and the possibility of outsized returns.