Plans to force millions of pension savers to invest in high-risk investments will put retirements at risk, the government has been told.
The Treasury wants to make it mandatory for pension funds to divert at least 5 per cent of retirement savings into UK infrastructure projects and private markets in an effort to boost the nation’s economic growth.
But the pensions industry has warned that having your life savings invested in political vanity projects could cost lower-paid savers dearly while those with gold-plated public sector pensions will not be affected.
Of the 2,000 people questioned for a YouGov survey this week, more than half said they had little or no confidence that the government would make the right decision about how their pension was invested.
The Times Smarter with Money campaign is calling for governments to stop making tax grabs on savings and investments.
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Will investing in the UK be mandatory?
Last year 17 leading workplace pension firms signed up to the voluntary Mansion House Accord, an agreement to invest at least 10 per cent of their default funds (where savers have not chosen their own investments) into private markets by 2030. Half this money is earmarked for investments in the UK, including infrastructure projects.
Among the signatories were Legal & General, Aviva and Nest, which hold pensions for several million people who could be affected.
Investments would still need to be in the best interests of savers, and under last year’s original agreement pension trustees could refuse any that would not increase the value of their members’ pensions. But the government is trying to give itself the power to make these types of investment compulsory.
This week the House of Lords debated Clause 40 of the Pensions Scheme Bill, which would grant the government “mandation” and allow it to enforce the Mansion House Accord, even though it was signed as a voluntary agreement.
There is no proposed limit on the amount that they could force trustees to invest.
Speaking at a trade conference on Wednesday, the pensions minister, Torsten Bell, said the power would remain in reserve — which means the government will not use it unless pension firms do not meet their voluntary commitments.
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He said: “The only purpose of the reserve power in the Bill is to backstop the Accord goals.”
But the shadow work and pensions minister Helen Whately said that mandation was a “sweeping government power grab over how people’s pension savings are invested”, and that the government had failed to clarify whether there was a “sufficient pipeline of investable projects”.
“Without that, huge sums chasing too few opportunities will mean lower returns for savers and smaller incomes in retirement. That would be the opposite of the original aim of the Mansion House process. Bad legislation like this carries a real risk of serious unintended consequences,” Whately said.
Almost half (49 per cent) of 2,127 adults in a YouGov survey commissioned by the Association of British Insurers (ABI) thought that the mandation was a bad idea. Some 72 per cent had little or no confidence in the government to make the right decision about how their pension is invested. Of those aged 45 and older, 46 per cent thought that requiring pension funds to invest in certain assets would reduce the amount of money they will have in retirement.
Yvonne Braun, a director the ABI, said the findings revealed “a deep unease” about the plans.
Who will be affected?
About 22 million people paid into a workplace pension last year according to the Department for Work and Pensions — 82 per cent of all employees.
The changes will not affect everyone but their impact will overwhelmingly be felt by those whose money goes into a scheme’s default fund. These are likely to be lower and middle-income earners who may not be engaged enough with their pensions to have chosen other options.
Precise figures are difficult to gauge because many people have more than one pension, but the number of those affected will be in the millions, said the former pensions minister Sir Steve Webb.
Defined benefit pensions — which guarantee employees a fixed pension after retirement based on salary and years of service — will not be affected because they generally do not have a pot of assets to invest. Instead, pensions are paid by contributions from existing employees.
These gold-plated schemes, given to civil servants, teachers, and doctors among others, cost the taxpayer £57 billion last year.
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What’s the risk?
The trade bodies Pensions UK and ABI have called for Clause 40 to be cut from the legislation entirely.
Braun said that while the Association strongly supported investment in the UK, it must always be driven by the savers’ best interests.
“Any power to mandate how pension funds invest, if used, creates a very real risk of artificially inflating demand for certain assets. This is fundamentally against how investing should work and increases the risk of asset bubbles that can deflate or burst, with savers bearing the cost,” Braun said.
Baroness Altmann, a former pensions minister, said the government’s plan was “very troubling because the powers were so wide”. She also warned that it could force trustees to invest in assets that go against the best interests of savers.
Altmann said: “If you wind back ten years, and they had these powers, they might have told every pension scheme to go and support HS2. Mandation powers are meant to be a backstop but ultimately they are a diktat. The extent of the powers that the government is putting in the bill are what’s called Henry VIII-style, which means they can tell you to put unlimited amounts into any of their chosen pet projects.”
Webb said: “Government simply should not be overriding the judgment of trustees as to what is in the best interests of their members. If it’s acceptable for this government to tell schemes how to invest for one reason, it becomes more acceptable for another government to use such powers for other objectives in future.”
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Can savers avoid it?
One way to avoid mandation is to opt out of the default scheme on your workplace pension, but this brings its own issues, said Webb.
“You’ve got to know what you’re doing. OK, you don’t want to be in the fund that the government is controlling, but what do you pick? Do you pick the global equity fund, or the balanced fund, or the sustainable fund?”
Savers may opt to move their money if they feel that a particular fund no longer works for them, but they may end up paying more in fees in the long run.
If you have previous experience of investing, such as with a stocks and shares Isa, you may feel confident choosing your own fund, which will give you more control over your pension pot.
If you are worried that your fund is underperforming, ask for the fund’s factsheet where you can measure it against its “benchmark” index. Don’t forget to factor in fees, when picking a new fund.
A Government spokesperson said: “Our pension reforms will unlock billions of pounds for the economy, supporting businesses to grow and creating well-paid jobs across the country that put more money into people’s pockets.
“Pension funds have committed to private market investment targets in the UK voluntarily, due to the potentially higher returns and security for savers. And thanks to our Pension Schemes Bill, an average earner’s pension pot could see a boost of £29,000, making pension pots work harder for savers.”