Could pension freedoms mortgage our future? too?

In her role as global pensions consultant, Jo Cumbo has been looking at early withdrawals from pensions around the world.

Having looked closely at Australia, where there is some evidence of increased withdrawals by younger members, the FT looked this weekend at Chile, the poster child for a privatized pension system. Apparently pensions there are under political threat from left-wing politicians keen to alleviate immediate poverty by giving people early access to their pension savings.

At risk is the capital base of the Chilean economy, which has been created by a compulsory 10% employee contribution. Also at risk is the free ride enjoyed by financial services companies who have invested the $200bn build up over the past 40 years in Chile’s economic miracle.

Chile’s government spends less than 3 per cent of GDP on pensions, compared with an average of 8 per cent in the OECD. But critics of the new withdrawals argue that taking out up to a fifth of the system’s assets to be spent now will mortgage the future finances of both state and population.

This problem with funded pension systems was highlighted last week when Richard Butcher warned that UK pension funds were at risk of becoming the Treasury’s piggy bank, and Jo Cumbo is right to mine this seam. The UK is now creating , in personal DC saving – a provident fund that could create the capital base to build Britain back better, it could also be used as a means test for universal credit and even a justification for winding down the state pension.

Our fund exempt from political interference?

All these things could happen though there is no evidence of a Government plan to outsource our welfare state via the back-door.

Nonetheless, the interventions of George Osborne, unlocking pension pots for immediate consumer spending and now Rishi Sunak’s calls for pension money to be sunk into a national infrastructure funds both risk blurring the line between private and public pensions.

The architects of the state pension, SERPS and S2P were accused of naivety in supposing their plans would survive political interference and that funding was the way for individuals to protect themselves from pension raids. But Cumbo is arguing that around the globe, private funded pensions can be used to support public enterprises – or even fundamental pillars of state welfare.

The timing of this trend towards early withdrawals and greater investment for social purpose is of course linked to the global crisis created by the pandemic and our financial vulnerability arising from a reduction in our productivity. We all know that the cost of fighting the pandemic will be born from future taxes and we worry that unpopular tax hikes can be avoided if pension funds are tapped as Butcher suggests.

The implication is that our private pension funds are not as private as we might have hoped. Indeed, some of the largest of our funds, the lifeboat Pension Protection Fund and the default workplace pension -Nest, are particularly vulnerable to state interference.

The importance of strong trustees

Cumbo’s second crusade in recent months, has been to promote the role of governance as a means of protecting our savings from being green-washed into under performing funds . The fear us that that poor funds attract money through slick marketing-  delivering more to the money managers than to investors.

With so many Government finance initiatives in place, it is only too easy for imposter funds to spring up which only pay lip service to social purpose. Separating the imposters from those genuinely engaged in ESG is a matter for expert scrutiny and this is why DB schemes are increasingly putting trusteeship in the hands of professional firms.

Similarly with those who govern our DC savings, the conflicts between platform providers, wanting to offer cut-price fund management at inflated ESG prices , need to be properly managed. I wonder whether all the IGCs , GAAs and commercial trustee boards have sufficient distance from the providers who employ them to call on “green-washing”. Time will tell and Cumbo is right to pursue this point.

Could pension freedoms mortgage our future?

The DWP and the Treasury are working together to an agenda where funded pensions are part of the building back of Britain post pandemic. They are eying the £3 trillion in funded pensions as a capital base for the investment they need to make this happen. We need to warn against our pension funds becoming their piggy banks. Relaxing the rules on the charge cap could mean that our workplace savings as well as the funds that underpin pension promises are used for social purpose. There is nothing wrong in that, but we need to be careful that releasing the charge cap doesn’t attract the wrong kind of fund management.

Meanwhile, the increase pressure on people’s finances, especially those in their fifties who may struggle to find ongoing work, makes the pension freedoms a potential source of social security for a Government who may not see universal and pension credit as the best welfare solutions. We must guard against the Government allowing the drawdown of private pensions to become a substitute for social security.

If we are not careful, we could see these pension freedoms as mortgaging our future.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Could pension freedoms mortgage our future? too?

  1. Eugen N says:

    Pension funds should only be invested in liquid assets, where there is expected return. If the Government has profitable projects which does not want to finance itself at very cheap Gilts yields and wants to offer an expected return of 5%+ per annum, then it could ask investment managers to run investment trusts which can invest in these projects, where pension funds could buy into.

    We have for our clients around 6% to 10% exposure to investment trusts like John Laing Environmental Assets (JLEN), International Public Partnership (IPP), the Renewable Infrastructure Group (TRIG) etc. These and other investment trusts could issue more shares to participate in other projects that could be made available.

    The problem here is that one day we want private funds (including pension funds) to invest in infrastructure, and afterwards we blame them as we did with the Public Private Partnership make profits for running hospitals, schools or bridges etc. We need to make our mind here!

    • Martin T says:

      Even using a fund wrapper to liquify infrastructure won’t always work since when stressed such funds will be closed to withdrawals. It isn’t possible to fully eliminate the illiquidity risk. Since I think such funds can form a part of a balanced portfolio I disagree that pension schemes should only ever consider liquid investments.

      I do agree though that such asset types should only be used where the risks are considered and properly rewarded.

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