Party leader Keir Starmer and shadow chancellor Rachel Reeves have their eyes on the £2.5trillion currently sitting in pension funds and want to mandate big companies like Aviva, Legal & General and Phoenix where to invest it. Investment experts warn this could make savers thousands of pounds poorer and put retirements at risk.
The vast majority of our pension funds are invested in foreign equities and low-risk assets like government bonds, rather than helping high-growth UK economies.
Starmer wants to change that. His party’s manifesto states that Labour will act “to increase investment from pension funds in UK markets”.
Amanda Blanc, chief executive of pension and insurance specialist Aviva, reckons it could unleash £100 billion.
Is this wise? There are arguments in favour, because big pension firms have largely forsaken the UK.
In 1997, they held 45.7 percent of UK quoted shares but that has fallen to a meagre 4.2 percent today, an all-time low.
This is starving UK companies of the cash they need to grow, driving down London Stock Exchange valuations which are now among the lowest in the world.
Many British blue-chips are considering shifting their stock listings to New York to raise more capital, including FTSE 100 oil giant Shell in what would be a disaster for the UK.
Labour would like to force pension companies to hold 25 percent of their portfolios in UK-listed assets, six times more than today.
And to be fair to Starmer, the Tories have woken up to the danger, too.
Conservative chancellor Jeremy Hunt has announced the British Isa and pushed through the Mansion House Reforms, which could unlock an additional £75billion of pension company funds for UK firms.
Now Labour could go a step further. It argues that the pensions industry enjoys £70billion of tax relief every year and needs to give something back.
Former pensions minister Ros Altmann has called the lack of domestic investment “astonishing” and called for new rules mandating that insurers invest 25 percent of their assets in the UK, in exchange for pension tax relief.
Baroness Altmann said: “If taxpayers are putting money in, they need to know that some of that is going to benefit them and the economy.”
She said it would help build a stronger economy for pension scheme members to retire into and “kick-start a virtuous circle for UK markets and growth.”
Tom McPhail, director of public affairs at consultancy The Lang Cat, said both the Conservatives and Labour are keen to direct pension company investment. “All we’re debating is how far down this road we go.”
Yet this isn’t without risk, and pension scheme members will be the ones bearing it.
Wealth management firm True Potential has warned savers could end up worse off if UK assets continue to underperform global markets.
Its figures show the FTSE All-Share has grown at an average rate of 7.26 percent in the last 20 years, trailing the 8.34 percent annual return from the MSCI ACWI global equities index.
The average pension pot of a 25-to-34 year old is £9,300. Over 37 years, the FTSE All-Share would turn that into £124,360 but if invested in global equities it would be worth £180,165, some £55,805 more.
True Potential’s head of central advice Neil Rayner warned that forcing pension funds to invest clients’ money in domestic markets could have unintended consequences. “Restricting investments based on geography increases the risk and volatility which could harm long-term results and make financial planning far more difficult for millions.”
In defence of Starmer and Reeves, one reason that the UK market has underperformed is that almost uniquely in the world, our pension and insurance companies have abandoned it.
That has to change.
Yet it still involves taking a gamble with the nation’s retirement savings. Will it work? We had all better hope so.
