Pension giants’ pledge to invest more in UK firms

Some of Britain’s largest providers of occupational pensions have pledged to pump more money into home-grown companies to boost growth.

Aviva and Legal & General are among the pension funds that have offered to invest up to 5 percent of their assets in so-called “unlisted stocks” – such as start-ups and private equity – by the end of this decade.

The deal is part of a package of reforms aimed at boosting pension fund investment in the economy that will be unveiled tomorrow in Chancellor Jeremy Hunt’s Mansion House address in the city. The speech — delivered annually — will be the government’s final policy announcement before the fall party conference season.

Hunt will tell an audience of business leaders that he wants to empower the financial services industry “to increase returns for retirees, improve returns for investors and unlock capital for our growth companies.”

He is also expected to say: ‘In everything we do, we strive for the best possible outcomes for pension savers, putting their needs first in any changes to investment structures.’

Hunt wants to channel more of the estimated £3 trillion in retirement savings into start-ups, fintechs and other high-risk assets such as infrastructure and private equity to boost returns, especially for younger retirement savers.

The Chancellor is also keen to encourage innovative companies to grow and stay in the UK.

The companies underwriting the commitment represent more than half of the £700bn defined contribution (DC) market. Unlike ‘gold plated’ final salary plans, DC pensions offer no guarantee of future retirement benefits and place all investment risk on the individual rather than the employer.

They have largely replaced final salary pensions, which became unaffordable for most companies.

It follows the recent decision by technology companies such as chip designer Arm to list their shares in New York instead of London. There has also been a dramatic decline in the amount of UK stocks held by domestic pension funds over the past two decades, which Hunt is keen to stop. But the Chancellor has stopped ordering funds to invest fixed amounts in specific sectors after managers and trustees claimed this would breach their obligations to pension savers.

He is pushing ahead with his proposals despite the recent troubles at Thames Water, where investors such as the £90billion Universities Superannuation Scheme will be wiped out if the debt-laden company returns to government control.

DC pensions have been boosted by the success of auto-enrollment, which has seen more than 10 million employees enroll in retirement plans for the first time.

But the amounts saved are relatively small, because the premium is much lower than with final pay schemes.

The government wants to give the pension pots a boost, especially for younger savers, by encouraging investments in assets that yield a higher return in the long term.

However, critics say this comes with a higher risk of savers losing money, as most startups fail, for example. They also argue that there is little evidence that growth companies of the future lack access to capital today.

The Chancellor will also launch a consultation to force the Local Government Pension Scheme, which has more than 6 million members, to go further in pooling the £360bn of assets belonging to 86 local authorities.