In my last post, I looked at the incredible good news, almost completely ignored by the public, that the funding crisis in defined benefit pension schemes has been solved. This has policy consequences. Vast sums of money, hundreds of billions of pounds, are now potentially surplus to the requirements of funding defined benefit pensions. There aren’t many places where hundreds of billions of pounds are floating around.

The public may not have noticed these developments but the government has been giving them attention. The government has no money to spend of its own: as journalist Tom McTague has noted, debt interest is now Britain’s second biggest government department, costing £116bn a year just to service it. And it has spotted a large source of funds that it hopes to be able to co-opt to its own purposes.

That is a big part of what lies behind the Chancellor of the Exchequer’s Mansion House agenda. He has the intention of encouraging greater investment by UK institutional investors in UK high-growth companies and he is pushing policies to encourage pension schemes towards unlisted securities.

He also is looking to improve efficiencies through consolidation. These plans still seem hazy. The current stated intention is to use the PPF as a consolidator “aimed at schemes that are unattractive to commercial providers.” So far, schemes that are fully funded on a buy-out basis have been able to access the insurer market and there are already consolidators aimed at schemes below that funding level. This looks set to be a damp squib unless the government is being particularly concise in its summary of aims.

Given the size of the assets we are discussing, the Chancellor’s plans seem very restrained. The concept is of “Expanding the range of quality investment vehicles, ensuring a sufficient range of opportunities for pension scheme investment in high-growth UK companies”, as the Chancellor and the Secretary of State for Work and Pensions put it in their letter to the CEO of the Pensions Regulator. These measures would if successful provide some benefit but they would not be transformative, because trustees could only commit a small part of their funds to such vehicles, given that trustee investment duties require them to invest appropriately to meet scheme liabilities.

From the government’s viewpoint, this is just as well. If trustees are to invest more of their funds in unlisted securities, they will inevitably invest less in other asset classes. Since one of the main asset classes of pension schemes is gilts, moves to other asset classes would tend to depress the price of UK gilts, making government borrowing more expensive. As noted above, UK government borrowing is already at a record high. This is not a minor point.

So the government has to tread carefully if it is to channel this torrent of private sector funds, for fear of creating a different set of major problems for itself. Are there alternatives? In my third and final post on this subject, I’ll take a look at that.