Workers could potentially lose thousands from their pension pots whoever wins the general election under an ‘Invest in Britain’ strategy, it is claimed.
It is claimed that the Shadow Chancellor Rachel Reeves has plans to encourage or – potentially – require pension funds to switch investments from fast growing global markets to Britain’s FTSE 100.
Separately, the Conservative Chancellor, Jeremy Hunt, has already announced measures to encourage UK savers to invest in UK companies rather than overseas.
However, a new analysis claims the average individual’s pension fund could be tens of thousands of pounds worse off over 37 years if it were invested in FTSE shares versus global equities.
The figures come from wealth management firm True Potential, who estimate the average pension pot of a 25 to 34-year-old is £9,300. If a 30-year-old’s pension fund invested this sum into the FTSE All-Share Index, the pot would be worth £124,360 by the time they retire aged 67.
However, if the pot were instead invested in the MSCI ACWI, a global equities index, it would be worth £180,165 over the same period – £55,805 more than if the money had been invested domestically.
If 20 percent of investments were switched from the MSCI ACWI to the FTSE All-Share, a pensioner would have lost out on £11,161 of investment growth by the time they come to retire.
The analysis assumes the 20-year average annual growth rate for the FTSE All-Share Index (7.26pc) and the MSCI ACWI (8.34pc).
Despite Labour’s manifesto pledge to increase pension fund investment in Britain, it is unclear what proportion of a pension fund would need to be allocated domestically.
Significantly, it is also not clear whether a shift to investing in UK companies would simply be encouraged or forced.
Labour’s manifesto states: “Labour will also act to increase investment from pension funds in UK markets.
“We will also undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets.”
Neil Rayner, of investment platform True Potential, said that while Britain was in need of more investment from private business, any move to force pension funds to invest their clients’ money in domestic markets could have unintended consequences for savers.
He added: “This uncertainty could come at the cost of a future generation of retirees who are currently diligently saving up for their retirement.
“Restricting investments based on geography increases the risk and volatility for these portfolios which could harm long-term results and make financial planning far more difficult for millions of people.”
Jeremy Hunt is already pushing pension schemes to invest in UK assets. In March, the Chancellor announced that all defined contribution (DC) pension schemes would be required to disclose their investment in UK assets from 2027, as well as their net investment returns and costs.
The measure built on plans announced last year as part of the “Mansion House compact”, in which some of the country’s largest DC scheme providers committed to invest at least 5 percent of their assets in UK unlisted companies by 2030.
Jason Hollands, of wealth management group Evelyn Partners, said Labour would likely “go one step further” than the Chancellor.
He told the Telegraph: “With Jeremy Hunt’s ‘compact’, pension funds agreed voluntarily. But there were those who thought this should be a requirement.
“The question we need to wait and see is: will Labour go for a carrot or stick approach – will schemes be forced to invest in the UK or merely be encouraged to do so?
“As an investor, you just want your pensions to be invested in the most attractive places, so more requirements are not necessarily a good thing. [Mandating investment domestically] would be good for the UK stock market but not necessarily the end investor.”
