Rachel Reeves wants pension funds to bail her out

Rachel Reeves, UK chancellor of the exchequer
Rachel Reeves tried to reboot the growth agenda with her Mansion House speech - Isabel Infantes/Reuters

The Budget bashed business, and also the Labour Party ratings. It mentioned growth more than 300 times and yet the Chancellor then hammered companies, entrepreneurs and generally made it harder to grow a business.

Rachel Reeves has now tried to reboot the growth agenda with her Mansion House speech on Thursday night. Her mission is to boost the amount UK private pension funds invest in UK private markets and infrastructure. Her problem is that simply making a speech is not enough. And many, many pensioners do not want the Government telling them how their money is to be invested.

There were some parts of the Chancellor’s approach that do make sense. She is building on the reforms I started as pensions minister, and Jeremy Hunt brought forward in the summer of 2023 with the Mansion House Compact. That compact stated that 5pc of the default pension funds would be invested into unlisted equities in the UK by 2030. Rachel Reeves has decided that this is not enough.

Her decision to force local authority pension schemes to merge is fine in principle, and seeks to emulate the Canadian and Australian example. Greater size will potentially save administration costs and definitely increase buying power.

But local authorities are responsible for over 5m local government pensions: many of those members want their own democratically elected authority investing as they see fit. With forced mergers, that influence is massively diminished.

What is envisaged is the local authority pension scheme acting as an initial investor in infrastructure, with private sector money following in behind. That is fine until the project does not attract private sector support – or worse than that, it fails. And infrastructure is notoriously hard to deliver and then get a return on.

To make matters worse, this Government is making such investment harder. The best recent examples are water companies, in which pension funds have invested very heavily. In most cases they are losing money for their pension investors. But the language and approach of Labour cabinet ministers, particularly the PM and Steve Reed, the Defra secretary, is making a difficult situation worse.

The water companies need private investment, such as the massive support that the USS, the Universities pension fund, gave to Thames Water several years ago. But the USS trustees are definitely regretting that investment now; in my view no pension fund will touch a water company in the UK for at least five years.

The Government’s approach, the uncertain regulatory future, the obvious struggle to get any return for members’ investment and so much more mean that this water infrastructure, which needs investment, will be shunned.

This instance highlights the fact that the hard work will be to create the products for the pension schemes to invest in.

For example, the only way Reeves will get the finance to invest in nuclear will be to create proper government-backed infrastructure bonds for pension schemes that are attractive in terms of risk and return.

The Treasury shows no inclination that they want to support the nuclear investment we so clearly need in this country. And yet, without Treasury support and guarantees no UK pension or overseas pension funds will invest in UK nuclear infrastructure.

Finally, transport infrastructure and some housing is blighted by a combination of excessive litigation, particularly by climate change activists seeking to block new developments, planning red tape overkill and the massive build costs in this country.

The PM and Chancellor will have to create the framework and projects that demonstrate to pension funds the opportunity, the certainty and the return needed to justify the investment. It is doable, but choices need to be made.

The Chancellor has shied away from mandating investment into UK productive finance. But her decision to accelerate mergers and consolidation of the master-trust multi-employer schemes is an extension of the previous Conservative government’s work.

Finally, it is crazy that we have two regulators trying to run one industry.

The Chancellor should take away the powers of the Financial Conduct Authority over some pensions and give it to the Pensions Regulator. Having been the pensions minister, it is very clear that pensions are a sideshow to the FCA. Put one regulator in charge with a new mandate to drive forward value for money for both the investor and the country. That would make a big difference.

The present approach is a case of two steps forward, two steps back. Without clarity and drive, this combined set of measures by the Chancellor will fail.

Guy Opperman was the Minister for Pensions and Financial Inclusion from 2017 to 2022.