Reeves plots pensions overhaul in push for growth

Rachel Reeves is preparing to use her maiden Mansion House speech to set out plans to overhaul Britain’s pension fund industry, in an attempt to pump billions of pounds of investment into infrastructure and the London stock market.
The chancellor’s reforms will be one of three key messages she delivers at the centrepiece City event this month to set Labour’s agenda for the economy, alongside measures to get “inactive” workers into jobs and strengthen the government’s new industrial strategy.
The speech will be Reeves’s next big opportunity to flesh out her economic policies following last week’s contentious budget.
Markets gyrated after investors in government bonds, or gilts, reckoned that her £40 billion tax hike and £140 billion of extra borrowing would push up inflation, therefore limiting the number of cuts that the Bank of England could make in interest rates.
Even so, the Bank is still expected to reduce rates by a quarter of a percentage point on Thursday to 4.75 per cent, after inflation fell below its 2 per cent target.
Reeves is understood to be attracted to Canadian-style pension reform — which would involve merging Britain’s local authority pension schemes, worth a cumulative £400 billion — after meeting the executives who run these schemes in August.
Some City sources also want to free up the £225 billion of surpluses held by old-style company final-salary, or defined-benefit, schemes — which, provided there is clear regulation, could be put to use in the economy.
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While ideas for freeing up pension surpluses were considered by the previous government, proponents are now stepping up their calls for reform. Serkan Bektas at Insight Investment, one of Britain’s biggest gilt investors, said: “When the government is talking about investing and having a growth agenda, defined-benefit pension funds can very directly contribute.”
The responsibility for pension funds holding a surplus has traditionally been transferred to insurance companies, but some City figures are pushing for these funds to take more control of the surpluses themselves. Then they could be used not only to invest in the economy, but, potentially, to boost payouts to pensioners as well.
But there would have to be a bigger backstop from the Pension Protection Fund, the industry lifeboat that plugs shortfalls when companies collapse, as well as strict regulation on the way in which surpluses are released.
The City is also looking to the Mansion House speech for detail on how Reeves intends to use the extra borrowing.
Patrick Thomson, chief executive of JP Morgan Asset Management’s European operations, said the market reaction to last week’s budget had been “relatively muted”, adding: “The market will be waiting to see that the money is spent wisely in actually fixing any underlying problems in the economy to have long-term impact.
“Ultimately, we want to see how this translates into growth, so the City will look to the forthcoming Mansion House speech for further detail on the proposed investment.”
A Treasury spokesman said: “Following this week’s budget to fix the foundations of the UK economy, the chancellor is focused on growth. Central to that are the next steps on pension reform, which will be set out in her Mansion House speech. This will unlock more private investment to fuel the government’s growth mission.”