Pension Reform: offering a counterfactual in defence of small schemes

Two interesting articles published in the Guardian have been causing much debate in our office both are by Will Hutton and have a similar theme of addressing the challenge that the new Labour Government have to fund its plans and encourage growth. Whilst many of its suggestions seem sensible, they do take a rather dim view of the role that small DB pension schemes might play.

It argues that Britain needs fewer and much larger funds on the basis that only they are able to diversify risk sufficiently to be able to invest more in the full range of productive assets, ­including those in the UK, to raise returns, boost the economy and lift pensions. The first article makes much of the success of the Pension Protection Fund (PPF) which is currently worth £33bn with a £12bn investment surplus.

Labour needs billions to fund its plans – and I know where it can be found | Will Hutton | The Guardian

Pension reform is the key to unleashing investment boom and turning round stock market | Will Hutton | The Guardian

However, I wonder about the counterfactual. The PPF has done brilliantly but how much of this is down to DB schemes being encouraged to derisk by the regulatory regime (and so releasing return seeking assets) and the PPF investing overseas to offset the UK exposure. Would the “small, high-cost zombie funds” be in a similar position as the PPF if, instead of derisking, they had been allowed to pursue long term growth strategies (perhaps with some of insolvency risk shared with the PPF). What would happen if they were allowed to pursue such strategies now?

Rather than these schemes being “consolidated into bigger funds that can take risks”, why not empower these schemes and their employers. Are they not better placed to understand what is needed to stimulate their own (and by extension) UK growth. Rather than rely on opaque private equity funds managed by super funds looking through a purely risk-return lens, why not more transparent local development funds which are then subject to market forces. As with LDI funds, the industry has shown itself as more than capable of taking complex market products and turning them into something more accessible to the wider market.

Another route to stimulating growth might be for the PPF to return some of the surplus to the employers whose contributions were its basis. These tend to well established UK businesses which have shown resilience, a long term outlook and a paternalistic attitude to its employees.

Reform yes but empower U.K. businesses directly not via superfunds and complex opaque investment structures. Consolidation will have an important role to play and impediments should be removed but then market forces should be allowed to play there part. My experience of Trustees of these smaller schemes are that they are sensible, practical people who care about their members and take pragmatic, serious decisions. If they are yet to be convinced by consolidation perhaps we should understand why rather than categorising them “guarding their independence so jealously that property market nimbyism looks tame”.