Rachel goes to Canada
The Chancellor has let it be known that her trip to Toronto is very much a fact-finding mission on pensions. Recent trips to Australia by pension delegations from leading insurers may need to re-route to Canada to find out more about the Maple 8 and how they are finding investment opportunities in the UK , that our pension funds, especially our big pension funds – are missing.
The Chancellor is reported in the FT, Sky , The Times and The Telegraph as saying
“The size of Canadian pension schemes means they can invest far more in productive assets like vital infrastructure than ours do.” …
“I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment,”
This is not -off the cuff; it is carefully orchestrated press management from the Treasury to let the pensions industry that the twin goals of “improving member outcomes through VFM” and consolidating pensions to allow them to invest more productively are at the heart of Government policy.
The press has picked up on the misadventure of one member of the Maple 8 – Omers – that has taken a bath over Thames Water. The toxicity of pension schemes investment in this one private stock stretches across the Commonwealth with the Australian McQuarrie Bank being fingered as the villain of the piece. USS followed on from Omers. Only the bankers have profited, pensioners have been sorely stung – Thames Water is an albatross around the Government’s neck.
I’d add that this visit comes in a week when the Government’s lifeboat pension scheme sold the highly profitable turnaround stock – Kodak – out of its pension and into the hands of a Californian private equity behemoth.
It is one thing for Government to make its intentions clear, it’s another to make them stick. Investment in productive finance by pension schemes must come with due diligence and be for the long-term. Thames Water and Kodak are examples of poor investment (TW) and short-termism (the PPF and Kodak)
Many will question whether pension funds should be taking on more risk which is simply being passed on to tax-payers. Should some of that risk be retained within the pension scheme and outcomes borne by and shared with pensioners?
Risk taking and risk sharing
While she is out there, Rachel Reeves will hear how the Canadian local government schemes have innovated to provide more with less by embracing aspects of CDC. In New Brunswick for instance , market and longevity risk are shared between participants in the plan rather than being born by local tax-payers.
Council Tax payers currently take all market and longevity risk on the pensions of those who serve them. So far they have been happy to do so. But the investment strategies of Local Government schemes look increasingly like those employed prior to the lockdown of pensions in the early years of the decade. Last century, pensions operated under the principle of best endeavours where the outcomes of pension investment were shared.
This led to a culture of surplus distribution but also to some pension schemes failing to deliver all that they promised. This is increasingly the culture in the Canadian pension system. While it is still a culture of defined benefit, the definition of the benefits is considerably more blurred.
The asymmetry of risk between a private pension system where risk is polarised between sponsor (for DB) and member (for DC) is in contrast to Britain’s public sector where risk is largely taken by the tax-payer. There are three ways of sharing risks , the first is to change the amount of the requested pension contribution is paid by the member, the second is to change the DB promise and the third is to agree to shared outcomes.
Canada, uniquely among mature economies, has explored shared outcomes. It seems to me a quid per quo worth considering by Reeves and her Treasury team, one that can be considered by Emma Reynolds and her Pension Review Team.
The gates to the graveyard
In a further Treasury “briefing” we learn from the FT that
the chancellor revealed that her set piece City of London speech at Mansion House in the autumn will focus on the partnership she wants to see between government, industry and regulators to deliver growth.
The gates to the quietest graveyard may yet be unlocked.
It is very hard to see how Rachel Reeves agenda can be achieved without further easement in regulatory guidance and practice. Recent moves to ease the excessive grip of the DB funding code and the regulations surrounding capital backed pensions (and superfunds) are steps in the right direction but there is much more to do before our regulators are in lockstep with the Government’s now-stated intentions.