Why Labour's Pension Megafunds Are A Bad Idea

Video Description

When it comes to this Labour government and pensions their big focus is on their Pension Review. Like when any new government comes to power, they always promise a review when they don’t necessarily know the full details of or have yet to come up with, ideas that are developed enough to present to the public. They want to criticise the last government and convince us things were bad before and by promising a review, they are essentially saying they think they can come up with something better. A review also justifies work for the Civil Service. Labour’s main aim with the Pension Review is to consolidate pensions. It wants fewer and larger defined contribution workplace schemes and it separately wants to merge all of the Local Government Pension Schemes. . Phase one of the review has recently been released and it already points to a worrying strategy going forward and a lack of understanding of how the pension market really works. Let me explain the truth and what you need to do to protect your pension funds. Phase one of the Pension Review: Pensions Investment Review – Interim Report gives us a good idea of the direction of travel for pensions under this Labour government. In the latest release the government say they would like to consolidate Local Government Pension Schemes. The government’s belief is that by merging all of these pension schemes into one, it can unlock the £392billion of assets these schemes hold and invest them better with more emphasis on investment into UK infrastructure projects and UK start-ups. It’s a bit misleading to quote the £392billion and make it sound like a large chunk of this can help go into growing the UK economy. Firstly, due to the nature of defined benefit pension schemes a large chunk of the scheme assets will be held in fixed interest investments like government gilts and corporate bonds. Currently at least 20% of the total Local Government Pension Scheme assets are invested in fixed interest assets. The other big theme to come out of the latest interim report is that the government wants fewer and larger defined contribution workplace pension schemes. They want to introduce a minimum size for ‘default’ pension funds (the funds your pension gets invested into if you don’t pick your own) and limit the number of default funds altogether. Again, by consolidating schemes and making them larger into pension megafunds, the government believe there can be cost savings and more importantly that they can get more investment of these pension funds into UK assets which they think will drive UK growth. They often quote the Australian pension model whereby they say that because Australia has these pension megafunds, more of Australian pension assets are invested in Australia and retirees get a better return. The whole point of creating the megafunds is for the government to get more investment into UK assets like infrastructure and UK start-ups. Although the government will appoint pension providers and investment managers to run these megafunds, they are only going to get the job if they comply with the government’s request. Less pension schemes means less competition so the ones that will do well out of this new system will be the big investment managers who will get the mandate to manage the pension investments. Worryingly, the government are even considering allowing your pension to be transferred from a smaller scheme to a larger scheme without your consent. Who are the government to say which pension is better for you and what you should do with your money?! You often here the government praising the Australian pension model and this is where they want the UK to get to. So, is the Australian model as good as they say? Whilst it’s true that Australian pension schemes do invest more in Australian equities compared to the UK, it’s not strictly true that this helps them perform better. Performance is actually very similar to the UK equivalent pension investment options. The real scandal that has not been discussed in the Pension Review so far is ‘default lifestyle funds’. #pensionmegafunds #pensions #governmentpension