Rachel Reeves wants to copy Canada’s ‘pension nationalism’ – is that a good idea?

Rachel Reeves has been extremely busy in the few weeks since she was appointed. Aside from discovering a £22bn “black hole” in the public finances, she’s been to the G20 finance ministers’ summit in Rio de Janeiro and is now in Canada meeting the bosses of big pension funds.

She is exploring how a more consolidated “Canadian-style” model for the British pensions system could boost returns to those reaching retirement while, rather more controversially, funding more British investments such as infrastructure projects. Pensions rarely hit the headlines until something goes wrong, but these are potentially significant changes to people’s retirement savings, and there are questions...

Pension nationalism. She wants the country’s pension funds “to drive investment in homegrown businesses and deliver greater returns to pension savers”.

On the positive side, it’s fair to say that many smaller pension funds can suffer from high overheads and costs, and deliver disappointing returns for pensioners. So there is a case for consolidation to win economies of scale, both for “money purchase” or “defined contribution”, which are entirely dependent on financial markets; and for “defined benefit” or “final salary” schemes, linked to length of service, but also invested in financial markets.

A prime example, often cited, is rolling the current 86 separately managed individual local authority funds in England and Wales into one giant scheme, worth approximately £360bn for its 6 million members. The Treasury, under the Conservatives, was already looking at such a plan, which they suggested could be combined with a relaxation in the rules on riskier investments, “unlocking”, for example, a further £25bn going into private equity schemes by 2030. There might also be more money for public infrastructure projects, either in partnership with state bodies such as the National Wealth Fund or with some underwriting by the Treasury to prevent losses.

The fear that funds, public and private, will be steered by a hard-pressed government anxious about economic growth into investments in the UK that yield poorer returns and/or are riskier. Pensions typically invest in government bonds and shares in blue chip and multinational companies such as Shell, Toyota, Unilever, Amazon, Netflix and Facebook, as well as broad-based investment trusts and some exposure to emerging markets.

By contrast, no sane saver would sleep easily if they knew their hard-earned savings were being funnelled into some no-hope British start-up or politically-motivated vanity UK public transport scheme, rather than, say, some proven enterprise in Asia. There is a looming issue here – as there always is – when politicians and financiers get involved in speculating with OPM - “other people’s money”. Pensioners and savers have a right to agency, and to demand the accountability of pension trustees and administrators to scheme members. It’s their future, after all.

This trend of “pension nationalism” is not confined to the UK, and has become a bit of a trend across the West because the global financial crisis and the Covid pandemic left government finances unable to fund even essential productive investments. Hence the fear that funds will be “raised” by politicians desperate to avoid borrowing, putting taxes up or cutting other public spending.

Well, it could be a win-win – higher growth, better water, energy and transport infrastructure, and a more prosperous economy in harmony with better pension returns. There are dangers. Traditionally infrastructure investment in utilities, for example, was a way for pension funds to almost guarantee steady, if unspectacular, returns for decades on end. But not always. The irony of Reeves’s trip to Canada is that a Singapore-registered subsidiary of Ontario Municipal Employees Retirement System, which held a 31 per cent stake in Thames Water, has had to write off its entire investment in the troubled company. Even if the British Treasury tried to underwrite all or part of such investments, the sheer scale of the sums involved might, in a doomsday scenario, force a default by the UK on its official debts. More likely it would end up with more inflation and a hike in taxes – and a “haircut” for pensioners.

For the moment, they can’t object too much because much of what Reeves has embarked upon had been started by Jeremy Hunt. It is also early days, and Reeves’s natural caution might well mean that the risks to pensions turn out to be modest. But she is meddling with what for many is their biggest asset after their home, and the political price of pushing them into poverty in their old age would be electoral oblivion. Although he was a fraudster, it is a good moment for all concerned to recall the temptations, misdeeds and legacy of a man named Robert Maxwell.