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Pensions minister Torsten Bell has publicly challenged the industry’s prevailing view that trustees who increase their investment in the UK economy risk jeopardising the outcomes for their members.
Trustees have a fiduciary duty to invest in the best interests of their members, primarily maximising returns. This has drawn many schemes to invest more in overseas markets where returns have been higher. But Bell said investing in the UK and optimising outcomes were deeply compatible, arguing for the wider economic benefits of domestic spending.
“I hear lots of talk about the tensions between the interests of the economy as a whole and those of pension savers. Those tensions can exist in some cases but they are often overdone,” he said, in his first public speech since his appointment as pensions minister in January. “A better economy underpinned by higher investment . . . is in everyone’s interests.”
The UK “cannot continue being the lowest investor in the G7”, he told an event hosted by law firm Eversheds Sutherland. He added that growth was “highly relevant” to the value of UK-invested pension savings, and that higher wages would help pensioners still working and recipients of the state pension because of earnings indexation.
Sir Keir Starmer’s government is trying to fire up Britain’s struggling economy and has argued that pension funds should spend more in the UK in order to help growth.
But pension trustees have pushed back against any assertion that they should consider the impact on the wider UK economy when making investment decisions on behalf of members.
“As trustees we are always looking for products that will provide higher long-term returns for our members — if the UK economy can give us such a product then we will invest in it for our members,” said Vassos Vassou, vice-chair of the Association of Professional Pension Trustees.
Elaine MacGregor, legal director at law firm Pinsent Masons, said that fiduciary duty means that UK investments are made to help spread risk, rather than “in order to meet any political agenda”.
She added that “any reforms proposed by the government which could be seen as either diluting fiduciary duty or mandating investment decisions at the expense of returns will likely be strongly resisted by pension funds”.
Ministers have made reforming the UK’s pension industry a cornerstone of the government’s plans to boost Britain’s economy.
The government plans to push more pension investment into Britain by consolidating schemes and improving assets available to invest in through its “ambitious planning reforms”, Bell said, and the approval of new solar farms, onshore wind and reservoirs.
UK pension schemes have among the lowest proportion of funds held in domestic stocks and private assets of any significant global pension market, according to think-tank New Financial, with just 4 per cent of assets held in domestic equities compared with a global average of 10 per cent.
UK retirement savings funds also punch below their weight in private markets, with defined-contribution schemes allocating just 2 per cent to unlisted British equities.
Last November, the government announced it would create a series of “megafunds” of at least £25bn of assets, across £1.3tn of defined contribution and local government pensions funds.
Bell said on Wednesday that larger schemes were “better able to invest in more productive asset classes . . . and that’s precisely because they can take a wider range of risks and build more sophisticated investment capacity”.
He added that scale also helps reduce costs, improves bargaining power in the investment process and changes the nature of ownership.
“Active, engaged owners are what this economy needs more of . . . scale doesn’t make that inevitable but it makes it significantly more likely and I put a lot of weight on that,” he said.
“The largest source of UK domestic capital matters in terms of its returns to savers but it also provides the financial plumbing for our economy and our capitalism. I think we’ve forgotten that in previous decades too often but we are not forgetting it today,” Bell added.