Labor set to force pension schemes to invest in £50bn ‘growth fund’

Labor is poised to force pension funds to invest in a proposed £50bn “future growth fund” as the party aims to increase the amount of capital available to fast-growing UK companies.

Shadow chancellor Rachel Reeves said she did not believe Labor should oblige pension schemes to invest in the new fund because of the goodwill in the sector, but added: “Nothing is off the table”.

Speaking to the Financial Times during a three-day visit to the United States, he said he also wants to speed up the merger of smaller British pension funds to consolidate the fragmented market.

Reeves, who visited the New York Stock Exchange on Monday, said he wanted to change the culture of Britain’s savings industry, freeing up domestic funds that could entice British companies to list in London.

He also wants pension funds to work with the state-owned British Business Bank to improve the UK’s “start-up performance, performance”, with Labor warning the country is trying to achieve “capitalism without capital”.

Reeves said: “A lack of confidence in the UK economy has led to too many businesses leaving our shores.”

Chancellor Jeremy Hunt is grappling with the same issues and is expected to outline his own proposals to channel UK pension savings into riskier businesses in his Mansion House speech in July.

In New York, Reeves will meet with business leaders and political strategists, including Joe Biden’s pollster John Anzalone and former Barack Obama adviser David Axelrod.

He will later travel to Washington to meet with Biden administration officials and deliver a speech in the US capital outlining Labour’s economic vision for the UK.

Reeves backed City of London Mayor Nicholas Lyons’ proposal to create a £50bn growth fund, investing 5 per cent of the assets of each defined contribution scheme.

Lyons said pension systems should be forced to make contributions to the fund, and Reeves was open to the idea, though he thought the goal could be achieved on a voluntary basis.

The Pensions and Lifetime Savings Association, a trade body, said last month it would oppose any move to remove full investment freedom from pension scheme trustees.

Reeves wants to improve Britain’s economic growth potential by consolidating Britain’s pension market, with roughly 28,000 contributory pension schemes, along the lines of Canada or Australia.

The UK government is already pushing for market consolidation, although progress is slow.

Smaller pension schemes with assets of £100m or less that underperform other funds in terms of costs and investment returns are expected to close or merge, with the Pensions Regulator given powers to force consolidation.

Reeves’ plans would call for smaller pension funds to merge to create the scale needed for new investment and include giving the regulator more powers to consolidate the sector.

The shadow chancellor said he believed pension schemes with assets of less than £200m were failing in their fiduciary duty to savers. “It’s hard to see how some of the smallest funds can provide value for money,” he added.

Reeves argues that some British companies end up moving abroad because they had problems raising domestic funding at an early stage.

The average allocation to UK stocks by UK defined benefit pension schemes has fallen from around 50 per cent in 2008 to around 10 per cent today, according to data from the Pension Protection Fund, which acts as a safety net for pension savers when companies fail.

Labor is highlighting high-profile businesses, including UK chip designer Arm, which have announced plans to go public in New York.

Labor, meanwhile, would create a framework that would allow pension funds to invest in promising new businesses alongside the British Business Bank, which would carry out due diligence.

Reeves backs Hunt’s plan to reform EU-era Solvency II rules designed to free up funds to invest in infrastructure projects, but said: “They’ve been talking about it for long enough – they have to do it.”

Andy Briggs, chief executive of insurer Phoenix Group, said there was an “exciting opportunity” for companies in the sector to invest in a wider range of assets with “attractive long-term return profiles”, but added that a range of options was crucial.