Hunt is now coming for pensions!

Surprise, surprise!

Our pensions are now piggybanks for the Chancellor’s pet projects



Governments are fond of tinkering with retirement plans, but this usually ended in economic tears

The relationship of successive chancellors of the Exchequer to our pension funds is not unlike that of Dick Turpin to stagecoaches: they are there to be plundered. Unlike the notorious highwaymen, however, our politicians don’t even have the decency to wear a mask to disguise their identity.

Jeremy Hunt is the latest in a long line of Treasury occupants to cast his beady eye over the vast pile of cash accumulated in pension funds and wonder how it can be used to finance a particular political or economic agenda. In his Mansion House address on Monday night, the Chancellor outlined how he wanted to tap into this to reinvigorate a flagging economy. Mr Hunt said funds should partly be directed into higher growth assets, including start-up businesses with potential to expand if they received the help they required.

A “compact” signed by nine of the UK’s largest pension providers commits them to allocating 5 per cent of their so-called default funds for defined contribution pension savers to unlisted equities by 2030. Mr Hunt has a point here. These funds, where retirement payments are based on investment returns, have an estimated £500 billion in assets but invest only 0.5 per cent in unlisted UK companies.

The Chancellor’s plan covers funds where investors do not specify what they want their money invested in and could unlock up to £50 billion of investment in high-growth companies by 2030 if all such UK pension schemes follow suit. He has sold it to the public as a scheme that will boost their pensions because of the higher returns.

Mr Hunt did not make the point that investing in stocks always carries a risk which is greater where start-ups are concerned since many fail. It is not inconceivable that this will cost investors money. There were more than 100,000 UK business closures in the first quarter of this year.

Why should we look to the Government to direct the investments when they are notoriously poor at picking winners? Even if his analysis is sound and his intentions good, it is hard not to be suspicious when a Chancellor who has other weapons in his armoury, such as tax reliefs and deregulation, reaches for the easy pile of cash.

This goes back a long way. We once had the most envied pension regime in the world. Fully funded defined benefit schemes used to be the norm, and a long-serving employee could expect to retire on 40/60ths of their final salary, with some index-linking of benefits to protect against inflation. Those schemes have all gone in the private sector for new entrants, though they still exist in the public sector, where the cost and risk is underwritten by the taxpayer.

The rot began in 1986 when Nigel Lawson imposed a 5 per cent cap on company pension surpluses at a time of soaring stock markets. The aim was to prevent businesses sheltering profits from tax in their pension schemes or using them for industrial restructuring by offering generous early retirement packages paid for out of the scheme’s assets.

Employers could choose to use surplus assets above the cap to improve member benefits or take a contributions holiday. Otherwise, the assets would be heavily taxed. Many opted for the holiday. Those surpluses would have been insurance against a rainy day when either markets turned down or demographics became less favourable. But the actuaries assured trustees that equity returns would deliver consistently high returns over time, making the promises look affordable.

During the 1990s this looked fine as a bull market raged. Pension schemes began to pay for themselves as double-digit annual returns allowed employers to take long contribution holidays. There was more tinkering in the 1995 Pensions Act, which required the gold plating of existing schemes by mandating a measure of index-linking, early payment for ill health and extending benefits to the employee’s immediate family. Effectively, employers were being made to pay for an extension of the welfare state.

By 1997, when Labour took office, surpluses were so vast that the new chancellor, Gordon Brown, considered this sufficient justification to abolish dividend tax credit for pension funds, thereby accelerating the demise of the final salary schemes when the markets took a nosedive and funds went into deficit.

Brown’s £5 billion raid was followed by a cascade of new rules and protections for investors after the Mirror pension scandal.

The history of private pensions for the past 40 years has been largely one of a first-rate system being trashed by political interference. Other factors have had an impact, not least the length of time people claim a pension after retirement, though this is less problematic now there is no requirement to buy an annuity.

Mr Hunt’s reforms are doubtless well intentioned, but his predecessors in the Treasury said that of theirs. The fact is that pension funds are an irresistible temptation for politicians to raid when they see their own motives as benign and are blind to the downsides. No doubt an incoming Labour government will be thinking how it can lay its hands on the cash, for instance through removing the 25 per cent tax-free lump sum which they have looked at in the past.

Moreover, under Mr Hunt’s proposals, there would be no requirement for the money to be invested in UK companies and our tax regime has scared away ultra-rich foreigners prepared to invest in new businesses.

The point is that the Chancellor has levers he could pull to improve investment potential. Why are pension funds so heavily invested in government bonds rather than shares, for instance? We discovered, during the ill-starred Liz Truss premiership, that risk aversion was demanded by regulators, and defined benefit schemes found themselves dangerously exposed because they had bought up gilts during a period of low interest rates.

Arguably, they were placed in that position by past Treasury interference. Private savers and pension schemes should invest more in equities, but many feel constrained from doing so either by high personal taxes or rules and regulations that are in the Government’s gift to change. It is high time they left our pensions alone.

Chancellor’s pension reforms to leave savers £1,300 worse off, official papers suggest



Jeremy Hunt’s plan to encourage pensions to invest more in Britain will leave savers worse off, the Government’s own modelling suggests.

The Chancellor unveiled a raft of pension reforms on Monday night in a speech to the City bosses, including a voluntary “compact” among the biggest pension funds to invest 5pc of their assets in start-ups and private equity.

The Treasury has claimed the reforms could boost pension incomes by more than £1,000 extra per year.

But internal modelling has shown the very high fees charged by private equity firms could erase returns for pension savers.

Government analysis estimates that in the average scenario, before fees, a worker earning £30,000 and saving into a pension for 30 years would have a pot worth £283,800 if 5pc of the money were invested in private equity.

If it were only invested in stocks and bonds, it would be worth £273,300, Department for Work and Pensions analysis showed.

However, after fees are taken into account, a saver who did not invest in private equity would be £1,300 better off, it found.

This is because private equity firms charge much higher fees in exchange for their investment expertise. Fund managers investing in stocks normally charge an annual fee of between 0.5 to 1pc.

Private equity funds, which back companies that are not listed on the stock market, often charge a fee of 2pc, as well as a performance fee. This can be as high as 20pc if the fund delivers a return above 8pc.

Pension fees are currently capped at 0.75pc, but this does not include performance fees.

The Government has suggested the pensions industry may be able to negotiate with private equity firms to charge just 1pc for annual management costs and 10pc for performance fees.

Laura Trott, the minister for pensions, said returns could vary and that the Government had taken reasonable assumptions in the report. She added that if 5pc private equity allocation replaced bonds instead of stocks, returns could be greater.

However, Rebecca O’Connor, of the provider Pensionbee, said she could not imagine pension funds being able to negotiate the numbers down so low.

She said: “It will be very difficult as there is a reason private equity firms charge such high rates – early stage growth businesses require a lot of research and you will not be able to reduce fees because the work involved will be the same.

“This is why these kinds of investments are not typically open to regular savers.”

She added: “We have to ask who these reforms are really for, when the models suggest the pay-off for savers could actually be quite low.”