Rachel Reeves has announced plans to create pension ‘megafunds’ aimed at unlocking £80bn of investment, as business disquiet grows over Budget costs on employers.
The chancellor used her first Mansion House speech to the City of London to outline an overhaul of pension funds – the most important reform of pensions in the UK for decades, she claims – designed to free up money to grow the economy.
Reeves said UK public sector pension funds in their current form were not big enough to generate good returns for British savers.
The government will introduce legislation next year that will merge funds that are managed by 86 local government pension schemes. The combined schemes in England and Wales will manage assets worth about £500bn by 2030. Workers will not see any changes in the level of their contributions.
Budget 2024
BT faces costs of £100m due to NI and minimum wage changes
The government may also look at merging defined contribution schemes in the private sector, set to manage £800bn worth of assets by the end of the decade.
At present, savers’ money is invested by 60 different multi-employer schemes. The government will consult on setting a minimum size requirement for these funds.
Reeves’ plans are based on similar schemes in Australia and Canada, where pension funds take advantage of their size to invest in assets that have higher growth potential.
Reeves said: “Last month’s Budget fixed the foundations to restore economic stability. Now we’re going for growth. That starts with the biggest set of reforms to the pensions market in decades to unlock tens of billions of pounds of investment, boost people’s savings in retirement and drive economic growth.”
She also said that financial regulation in the wake of the economic crisis of 2008-2009 had exceeded its usefulness: “These changes have resulted in a system which sought to eliminate risk-taking. That has gone too far and, in places, it has had unintended consequences, which we must now address.”
Positive step
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association, told The Times: “[The] reform proposals are a positive step towards ensuring our system delivers the best value for money for savers.
“We support consolidation where it is in the interests of members and represents value for money.”
Michael Aherne, a partner in the pensions team at law firm Herbert Smith Freehills, said on their own the plans wouldn’t automatically achieve her key aim of increasing pension investment. He said it also needed to be married with “increased investment sophistication and governance to credibly deliver better outcomes, both for scheme members and for UK plc”.
Aherne added: “The proposed minimum size requirements for master trusts are new and will be controversial. Many master trusts are currently operating successfully with assets well below the threshold of £25 billion to £50 billion which the chancellor is said to have in mind.
“Subject to that important point, the direction of travel is positive. The government appears to understand that this is a whole-of-system problem, and that it will need to address key issues such as increasing minimum pension contribution levels, improving UK plc’s competitiveness and simplifying planning reform.”
Employers’ concerns
Meanwhile, business leaders have told Reeves that measures announced in the budget – in particular the hike in employers’ national insurance contributions – would reduce growth. The British Retail Consortium said in a draft letter to Reeves that its members would not be able to absorb the costs.
“The sheer scale of new costs in the Autumn Budget and the speed with which they occur, together with costs from a raft of other regulation, create a cumulative burden that will make job losses inevitable, and higher prices a certainty,” it said.
The rate of employer’s NI contributions (NICs) will increase by 1.2 percentage points to 15% from April 2025. Employers’ costs will also increase because of the lowering of the minimum threshold, which means employers will start to pay NICs on employees’ earnings from £5,000 instead of the current £9,100 threshold.
The national living wage increases 6.7% from £11.44 to £12.21 per hour from April also, while 18 to 20-year-olds will see their national minimum wage rise by 16.3% to £10 per hour.
CBI response
Rain Newton-Smith, chief executive of the Confederation of British Industry (CBI), echoed the BTC’s concerns. She said: “There’s a lot of disquiet in the business community on whether this government is solidly focused on that growth mission. If you look at the next three to five years you see that business investment is weaker because of decisions made in the Budget.
“Chief executives look at some of the measures in the budget and say this is going to make it harder to make the decisions to invest in the UK. Business leaders do credit the focus on long-term infrastructure … but what I don’t see is that real plan for growth over the next three to five years. I think that has really taken the business community by surprise.”
Reeves used her speech partly to allay the concerns of business leaders. She told them she was a free trader at heart and warned that “we cannot take the UK’s status as a global financial centre for granted. In a highly competitive world we need to earn that status and we need to work to keep it.”
The chancellor described several changes in the pipeline, some of which had been proposed by her immediate predecessor, Jeremy Hunt. These include obliging regulators to take into account growth, as well as financial stability; and replacing the current “certification” regime for investment professionals, with a “more proportionate approach”.
Institute of Directors response
Anna Leach, chief economist at the Institute of Directors said it was worrying that GDP had declined by 0.1% in September but applauded the chancellor’s pension reforms.
“The chancellor has announced welcome reforms to consolidate fragmented pension funds in her Mansion House speech, as well as other reforms to redirect UK regulators to better supporting growth. Alongside the capital behind the National Wealth Fund and updates to the fiscal framework to accommodate and incentivise government investment, it is good to see further steps being taken to create a supportive environment for investment. And the call to improve trade ties with the EU is welcome and a top priority for IoD members.
“Today’s GDP data highlight the fragility of UK growth, however. Reforms that potentially support longer term growth sit uneasily alongside Budget measures that will more rapidly and certainly damage investment, employment and growth. We will continue working with the government to ensure that the UK is a competitive environment for business and growth, both now and in the future.”
This article was updated on 15 November
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