Pension Funds and Economic Growth

Rachel Reeves’ proposed merger of Local Government Pension Schemes and consolidation with defined contribution pension schemes to create a mega-fund to unlock investment and boost growth is high risk and needs safeguards and guarantees. This is not Government or taxpayers’ money but belongs to the members of each particular pension scheme and is in effect their retirement savings. When Gordon Brown altered the tax position of pension funds he sent many into deficit which brought about the demise of defined benefit final salary schemes – with even the Local Government Schemes moving from “final salary” to “average salary”. The index linking used to be to earnings, then RPI and more recently changed to CPI – even for pensions in payment.

These changes are not being made by the Chancellor to improve pensions but to use pension funds to boost investment in search of growth. Economic growth is the Government’s priority. But what are the risks and knock on effect of this proposal for pensioners? One cannot fix whole systems problems with component level solutions.

There is a wealth of empirical evidence into the social determinates of health which has demonstrated the correlation between income and demand upon the NHS. 3/5ths of the expenditure of the NHS is on older people. Therefore, to constantly reduce or risk the income of older people, who got no benefit from the two  pre-election reductions in National Insurance but do pay more income tax due to the freezing of the tax free personal allowance, recently lost their free TV licence and now their winter fuel allowance will increase the pressures on the NHS at the very time Government is committed to reducing waiting times.

The NHS and social care need radical reform, restructuring and cultural change based upon a whole systems review. The hard-working dedicated professionals working in health and social care need liberating from the constraints of the component level contract culture by replacing it with an outcome orientated whole task enabling leadership culture.

That 29% of children are being brought up in poverty, 2/3rds of whom have a parent in work, in one of richest countries in the world is an absolute disgrace. However, unless Government addresses pay differentials chasing investment in search of growth will, as recent history has shown, make the rich richer and leave the vast majority very little better off than they were before the 2009 banking crisis. Individual Countries now operate in a global economy with the large corporations and multi-billionaires operating globally outside the control of individual Governments, fuelling income inequality and poverty worldwide. Governments need to adapt to this changing world by getting together, possibly through the United Nations, to get to grips with this rapidly developing situation.

 

 

* Chris Perry is a former Director of Social Services for South Glamorgan County Council, a former Director of Age Concern Hampshire, a former Non-Executive Director of the Winchester and Eastleigh Healthcare NHS Trust and a former presenter of an award-winning public affairs programme on Express FM.

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19 Comments

  • This is an area ripe for challenge. It originates with the Tony Blair Institute (who appear to be providing government policy these days), the same Tony Blair who as the author identified destroyed the private sector defined benefit schemes. The TBI paper seems to ignore that defined contribution pensions are effectively individual pots of money for each persons retirement and looks to claim them as government play things.

    If government creates a strong economy then Pension funds will invest in UK assets to take advantage of it. If the government strong arms (or just requires) “investment” in UK assets it will almost always be in bad returning assets and cause more pension issues down the line and disincentivise pension saving (also harming long term growth).

    Noone is giving the government the appropriate level of kicking for the economic illiteracy on this issue. Citizens savings for their retirement are not a pot the government should be raiding to push funds to assets that will make them look marginally less useless in the short term.

  • Daniel Stylianou 23rd Jan '25 - 11:40am

    I am completely illiterate when it comes to pensions, being in my 30s (and shamefully uninformed!) I have only ever worked in the civil service so I have my pension there – will the proposals by the government affect that?

  • Steve Trevethan 23rd Jan '25 - 3:45pm

    Thank you for an important, prescient article.

    Might its submerged purpose be to benefit the financial industry?

    Might such a move be a device or legalised form of fraud as, so far as one can tell, it is not being put forward to enhance and/or protect pensions, which is a foremost duty of those in charge of pensions, but for some other not securely pension benefiting purpose?

  • Peter Davies 23rd Jan '25 - 5:18pm

    @Steve No. It is not to benefit the financial industry. They will lose out from it. It is based on an incredibly arrogant belief that the government is a better investor than the professionals.

  • Steve Trevethan 24th Jan '25 - 8:36am

    Might government and professional investors have different purposes?

    Might one invest for the general good of citizens and their children and the other invest for the particular good of individual citizens and their children?

    Might both be sometimes astute and sometimes fallible?

  • Peter Davies 24th Jan '25 - 10:10am

    They might well have different interests. Professional investers invest in what they believe to be the best interests of the pensioners who entrusted them with the money. Politicians will “invest” in enterprises that they think will return political capital. Even against those objectives they generally fail.

  • @Steve Trevethan and Peter Davies: a crucial difference between government investors and professional investors is that when professional investors screw up the underlying investors (or the pension fund trustees acting for them) can take their investments elsewhere.

  • Peter Davies 24th Jan '25 - 12:10pm

    The equivalent for governments is that they take their votes elsewhere. We should be in a position by the next election to tell evvery local authority employee and former employee how far their pension has underperformed the market as a result of Labour hubris.

  • David Garlick 24th Jan '25 - 12:39pm

    Presumably all pension funds must ask their members before they are able to agree to such a scheme?

  • David Garlick 24th Jan '25 - 4:18pm

    @MA.
    As a LA pensioner reducing costs reminds me of the total mess local authority finances are in after years of reducing costs. Ditto for the NHS.

  • Chris Perry 24th Jan '25 - 6:42pm

    According to Oxfam the wealth of global billionaires grew by £35m per day during 2024. Adding more weight to the fear that growth for billionaires is coming at the expense of the rest of us and that the wealth is not being made by billionaires: it is being taken. Whilst reducing global poverty has been almost at a standstill since 1990 the wealth of those at the very top has skyrocketed. The World Bank, Oxfam says, points out that reducing inequality would facilitate the end of extreme poverty three times faster. According to the Equality Trust the control this wealth gives billionaires over our societies has never been more visible. Polling from “Patriotic Millionaires”, published today, finds that two-thirds of all millionaires think that the super-rich are a threat to global stability, while 72% want higher taxes on the super-rich and 70% think the super-rich are eroding trust in democracy by exerting control over the media. Widening income inequality and increasing poverty are the great social evils of our time. Unless Government tackles pay differentials chasing investment in pursuit of growth will favour the rich at the expense of the workers, people with disabilities or illness, older retired people and children. Those at the top could still have their million pound salaries provided they paid those on whose hard work they depend proportionately.

  • According to the UN, in 1990, 37.8% of the World’s population lived in extreme poverty. By 2014 that had fallen to 11.2% (https://www.un.org/en/global-issues/ending-poverty). In the 10 years since then it’s fallen further to 8.5% (https://www.worldbank.org/en/publication/poverty-prosperity-and-planet) I’d love to know @Chris Perry how on Earth you think an almost fourfold reduction in extreme poverty levels amounts to ‘standing still’

  • Chris Perry 24th Jan '25 - 9:55pm

    @Simon R
    These figures were taken from a press release by the Equality Trust issued earlier today.

  • Liberal Democrats have accepted some suggestions made by the Patriotic Millionaires. It is time they discussed the rest of them (https://patrioticmillionaires.uk/latest-news/policy-recommendations-2024).

    Simon R,

    It should have been easy for you to discover why Chris Perry stated that poverty had almost stood still since 1990, as it is stated in the World Bank report that you provided the link to,

    ‘Around 3.5 billion people (44 percent of the global population) remain poor by a standard that is more relevant for upper middle-income countries ($6.85 per day), and the number or people living on less than this standard has barely changed since the 1990s due to population growth.’

    The graph gives figures – 3.665 billion in 1990 and 3.574 billion in 2022.

  • @Michael: The statistics you quote don’t take account of that, since 1990 the World’s population has increased by over 50% – from 5.3 billion to 8.2 billion people. 3.665 billion living in poverty in 1990 represented a massive 70% of the World’s population. Reducing the % of people in poverty from 70% to 44% is not standing still: It’s remarkably good progress. Maybe not as much as we’d ideally like because 44% is still a lot, but good progress nonetheless. And made even more impressive by the massive reduction in numbers of people living in extreme poverty – which appears to represent a lot of people moving from extreme poverty to (not extreme) poverty.

  • I am slightly confused. What is the thrust of this article ? That we need to find answers to to the problems of the NHS and Social Care ? Absolutely ! Wealth is concentrated in the hands of a few billionaires ? Quite agree ! But I’m less clear how this links to the need to reform pension regulations.
    Based on all we know about the long term performance of financial markets, the exceptionally cautious regulations placed on many pension schemes prevents the trustees from maximising the benefits for the scheme members. Allowing (not obliging) pension funds to invest in a wider range of investment opportunities is not some crazy, right wing economic experiment. It is simply mirroring what, for example, Canadian pension funds, can do. You may not be familiar with the Ontario Teachers Pension Fund, but they have the financial heft of a small nation.

  • Katharine Pindar 26th Jan '25 - 10:40pm

    Absolutely, as Michael BG says above, our party should be discussing the proposals of the Patriotic Millionaires that we have not yet embraced, with a view to pressing them on the government where we accept them, hopefully as we could at Spring Conference. The Guardian on January 22 reported a new poll undertaken by the PM group of more than 2000 millionaires, which apparently found that more than half believed extreme wealth concentration was a threat to democracy.
    The first of their ten proposals made last June (see the link Michael gives) is to apply a 2% wealth tax on assets over £10 million, which they said could raise up to £24 bn a year. The second proposal, to equalise capital gains and income tax rates, is comparable to our own policy. And I feel especially in sympathy with the third, to apply National Insurance to investment income such as dividends from shares, rent from property, and interest on savings, because it seems to me it would be fairer to tax wealth currently growing than the inheritance tax increase now oppressing family farmers.

  • Peter Martin 27th Jan '25 - 6:51am

    In principle, there should be no objection to Pension funds doing what they like with their funds providing the risks of the investments are accepted by all. In practice for political reasons, and especially with public sector pension funds, the government will have to underwrite them in the event the investments fail and pensions cannot be fully paid.

    The case for involving the private sector is only valid if the commercial risks involved are accepted. However, they naturally don’t want to do this. They want the government to underwrite or de-risk their investments. As we’ve heard often enough in the past, they want to socialise any losses and privatise the profits.

    If the government is effectively going to be de-risking the investments of the pension funds why does it need their money? It may as well use its own money and

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