In April Chancellor Jeremy Hunt made it clear that he thought the UK pension system needed serious reform in order for pension holders to get a better return on investment. He made the comments while speaking at the International Monetary Fund’s spring meeting in Washington. The Telegraph reported that he stated that “big reform” was needed, and suggested that the UK could follow the lead of other countries, where the ability to take on more pension risk could potentially lead to higher returns.
But is this the right approach?
What would Hunt’s plans involve?
In other global nations, such as Canada and Australia, the pension fund industry has seen some consolidation. This consolidation means that it is easier for pension fund managers to invest in funds that are unlisted, and which may potentially offer higher levels of growth. As well as potentially helping pension holders, it would also help to diversify the ways in which growth companies are financed.
It was reported that Hunt has appointed non-exec GSK director, Sir Jonathan Symonds, to his economic advisory council with a view to taking his informal advice on improving the returns of defined contribution pension schemes.
If consolidation is not possible, Hunt stated that he has not ruled out the idea of mandating pension funds to invest in certain areas in a bid to improve growth.
What is the problem with Hunt’s plans?
While the idea of higher returns on pension investments is an appealing one, the UK pensions industry has its concerns.
Nigel Peaple of the Pensions and Lifetime Savings Association has expressed his concern that such a move could impair the main role of pension trustees: looking after the best interests of their savers.
Furthermore, such a move would destroy the freedom that pension funds currently have to choose whichever investments they want. While some pension holders would be happy to go for higher risk investments, others will be more risk-averse. While the aim is to boost pension payouts, this would not be guaranteed: investing in higher-risk vehicles could well see pension funds decreasing rather than increasing in size.
Currently, Hunt’s plans are still in their infancy with nothing yet formally decided. However, if he decides to mandate riskier pension investments, he risks a great deal of backlash from the industry and from pension holders alike.
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