George Parker and Josephine Cumbo of the Financial Times report Rachel Reeves to announce plans to create ‘Canadian-style’ pension model:
Chancellor Rachel Reeves will meet bosses of big pension schemes in Toronto on Wednesday, as she seeks to create a “Canadian-style” model in the UK with massive retirement funds investing in equities and infrastructure.
Reeves wants to unlock the investment potential of the £360bn local government pension scheme, which has more than 6mn members but is fragmented into 86 individual funds in England and Wales.
If it were a single fund, it would rank among the top 10 biggest funds in the world. Reeves wants the UK market to achieve the scale of the megafunds operated in Canada by the so-called Maple 8.
“The size of Canadian pension schemes means they can invest far more in productive assets like vital infrastructure than ours do,” the chancellor said on Tuesday. Achieving this consolidation is a key challenge for Reeves.
Former Conservative chancellor Jeremy Hunt also wanted to build a Canadian-style pensions model in Britain, but progress had been slow.
Reeves has announced a review, overseen by the new pensions minister Emma Reynolds, to look into how to achieve scheme consolidation and put pension funds to use in promoting UK growth.
An ally of the chancellor said a new pensions schemes bill would create a “value for money framework” to promote better outcomes for savers.
Reeves has so far not supported “mandating” UK funds to invest in certain asset classes. Her allies said there was a “live debate” on the issue, but noted the fiduciary duty on schemes to invest on behalf of their members.
While in opposition last year, Reeves said regulators could intervene to force the merger of smaller schemes. She said she believed retirement plans with less than £200mn in assets may be failing in their fiduciary duty to savers. “It’s hard to see how some of the smallest funds are delivering value for money,” she said then.
But translating the Canadian model, which includes the Ontario Teachers’ Pension Plan and Caisse de dépôt et placement du Québec, may not be the panacea envisaged by politicians across the political divide in the UK.
Canada’s Maple 8 funds are noted for their deployment of assets into infrastructure schemes across the world and Reeves has shied away from the idea of compelling UK funds to invest in Britain.
Their investment in “productive assets” has not always gone smoothly. In May, a Singapore-registered subsidiary of Ontario Municipal Employees Retirement System that held a 31 per cent stake in Thames Water wrote off its investment in the troubled utility.
But Reeves told a round table of US investors in New York on Tuesday that she wanted to see pension fund assets used to buy listed and unlisted equities as well as to back infrastructure projects, offering better returns to savers.
“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,” she said.
Reeves will also meet Mark Carney, former Bank of England governor, in Toronto to discuss how best to deploy investment in Britain’s clean technology sector.
Meanwhile, 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.
Separately, Reeves has in effect ruled out using her Budget in October to change the rules so that pensioners working beyond the state retirement age of 66 should pay national insurance contributions.
The idea has been mooted as a way for the chancellor to close a hole in the public finances but Reeves, speaking on her visit to the US and Canada, said there were “no plans” to make pensioners pay NICs.
Allies of the chancellor said that in this case “no plans” meant she would not make the change because it would defeat her objective of keeping people in the workplace.
The Guardian also reports on why Rachel Reeves want to copy Canada’s pensions model:
The chancellor, Rachel Reeves,
met the bosses of Canada’s big retirement schemes in Toronto on
Wednesday, prompting speculation that Labour is planning to bring the
country’s public pension model to the UK. But what would that entail and
could such a change actually work?
How is a Canadian-style pension scheme different from the UK model?
Canada’s
public sector pension schemes, like those in Norway and Australia, have
been consolidated into larger funds which are managed in-house by
professional investors. Once pooled, public sector retirement funds can
invest larger sums of money into a wider range of riskier and long-term
assets like infrastructure, startups and private equity.
Canada’s
top schemes, known as the Maple 8, collectively manage around $2tn
(£1.1tn) worth of taxpayer-backed pension schemes for the likes of
teachers, municipal employees and healthcare workers.
In
the UK, however, there is a focus on reforming one single, but very
large, portion of the pension landscape: the local government pension
scheme. The LGPS is the national pension scheme primarily for people
employed by local governments.It is one of the world’s largest
defined-benefit schemes – offering a final salary scheme to retirees who
joined before 2014 and a career average salary scheme to those who came
in after – with 6.5 million members, and £360bn in assets.
However,
the scheme is fragmented into 86 individually managed retirements funds
that vary in size: while Orkney and the Isle of Wight had around £500m
and £700m in assets, respectively, as of 2022, Greater Manchester had
around £27bn.
Those pushing for consolidation
say a pooled LGPS fund would be able to deploy large sums of cash to
growing businesses and infrastructure projects, including in the UK.
Critics
of the current model also say pooling would help reduce inefficiencies,
helping save at least £1bn in fees paid to teams of lawyers, banks,
advisers, asset managers and actuaries each year.
Is this idea new?
There have been various attempts to create superfunds of some type over the past decade.
In
2015, the then prime minister, David Cameron, started to push local
government pension scheme funds into larger pools, with the intention of
cutting investment costs and allowing for collective investment in
assets like infrastructure.
However,
there was no immediate deadline for how quickly individual schemes had
to shift their assets into intermediate vehicles, which themselves came
under fire for adding another layer of costs. Only £145bn or 39% of LGPS
assets have been transferred to the eight current pools, according to
the Pensions and Lifetime Savings Association, a trade association for
workplace pensions.
Last autumn, the Conservative then chancellor, Jeremy Hunt, hinted at further consolidation,
saying that by 2040, all local government pension fund assets would be
invested in vehicles worth £200bn or more, leading many to speculate he
wanted to cut groupings down into two or three pools.
However, so far governments have stopped short of introducing laws that would compel schemes to do so.
Why hasn’t this been done yet?
It
is largely a matter of politics. For one thing, responsibility is
divided across government departments – including the Treasury,
Department for Work and Pensions (DWP) and local authorities – making it
harder for ministers to make sweeping decisions about consolidation
without cooperation.
However, some believe that
the Labour government’s decision to appoint Emma Reynolds as a
cross-department parliamentary secretary at both the Treasury and DWP
could smooth this hurdle.
Meanwhile, few
governments have been keen on launching into bureaucratic battles with
local councillors, including those from their own political parties, who
do not want to give up control of how their pension money is invested.
“These
are locally elected politicians making decisions that will impact local
government. Councillors take their responsibilities very seriously, and
feel that they should have some say in things which are going to affect
their services and their council tax,” says Toby Nangle, an independent
analyst and pensions expert.
There is also the
matter of the reams of lawyers, asset managers, banks and actuaries who
will otherwise lose out on the £1bn in annual fees that critics say can
be stripped out through consolidation.
And proponents of a more fractured model argue it will affect the diversity of investment by UK funds.
The
Pensions and Lifetime Savings Association says it is keen to work with
the government on reforms but warned about the potential tax and legal
costs that could be involved in transferring the assets into larger
pools or a superfund: “The transfer of assets should be undertaken in an
efficient and effective way with a focus on avoiding loss of value.”
And the BBC also examines whether Rachel Reeves' public sector pension plans will work:
Chancellor
Rachel Reeves wants to “fire up the UK’s economy” by creating a
“Canadian-style” pensions model for the UK’s local government retirement
schemes, according to the Treasury.
She
had a meeting with the so-called “Maple 8”, a group of massive Canadian
schemes, to hear how consolidating UK pension funds could boost the
economy.
But what does that mean for savers?
The
government claims Ms Reeves' pensions review will "boost investment,
increase pension pots and tackle waste in the pensions system".
By diversifying investment, the government says the plans could boost pension pots by £11,000 and pour £8bn into the economy.
This includes investments in science, technology and infrastructure.
As
part of these plans, the review is also looking at how the Local
Government Pensions Scheme (LGPS) can get more from its investments
while tackling a £2bn bill for fees.
But
because the LGPS is a defined-benefit scheme, where workers' pensions
are based on salary and service length, savers will not see any higher
return in their pension payments.
What is the Local Government Pension Scheme?
There are 86 local government pension funds in England and Wales, which are mainly paid into by local government workers.
These
individually managed funds are divided by local authority, making it
more costly, because each fund is paying its own management and
administration fees.
The schemes are all part of the Local Government Pension Scheme (LGPS) in England and Wales, which is the seventh-largest in the world, according to the UK government.
Most of its participants are low-paid women.
Under Ms Reeves’ plans, the funds would be consolidated in some way, although at present it is unclear exactly how.
She
may ask them to pool their assets and resources, or she may ask them to
merge with one another to create a smaller number of larger funds,
which would benefit from greater financial firepower and fewer costs.
The
LGPS is a defined-benefit scheme, which means that, when it is time to
draw their pensions, its savers get an agreed amount based on their
salary, no matter what the fund is worth at the time.
That is different to private pension pots, which rise and fall in value depending on how investments perform.
What is the 'Canadian model' and why does Ms Reeves believe it can help the UK economy?
The “Maple 8” is a group of vast Canadian pension funds, including the Ontario Teachers' Pension Plan, which manages assets worth C$247.5bn (£141.8bn), and the Canada Pension Plan, whose assets are worth C$409.6bn.
The government wants not only public sector funds to "learn lessons from the Canadian model" but also private sector funds.
While
UK pension schemes tend to invest more in assets like equities and
bonds, their Canadian rivals focus more on private markets.
Instead, it skews its investments towards private markets, including infrastructure (including a 25% stake in British energy giant SSE) and private equity deals.
Individually,
the UK’s 86 local government pension schemes vary in size, from Greater
Manchester’s massive £30bn fund all the way down to several schemes
which are “sub-£1bn”, according to Joanne Donnelly, board secretary at
the Local Government Pension Scheme Advisory Board.
Running
these schemes costs money. Each one must pay administration, governance
and management costs, which can build up – last year, those costs increased by £28m.
Like her predecessor, Jeremy Hunt, who also announced plans for a Canadian-style model, Ms Reeves believes consolidation would save money on those costs.
That would in turn “deliver better returns for savers and unlock billions of pounds of investment”.
What is 'pooling'?
In one way, LGPS funds have been consolidating since 2015, when then-chancellor George Osborne set out plans for them to pool resources and assets.
The
result was eight “pools” of funds, which are designed to improve
economies of scale and improve funds’ ability to invest. These are expected to make savings of £2bn by 2033.
In last year’s
Autumn Statement, Mr Hunt set a deadline to local government pension
funds, saying that by March 2025 they must have transferred all their
assets into pools.
But Ms Donnelly says in reality, this is unlikely to happen. “It’s nice to have a target,” she says.
There is another option for pension funds: consolidation through a series of mergers.
This would not be the first time that has happened – 400 funds were consolidated into 88 in 1972.
How do the pension funds feel about the prospect of mergers?
“Bigger
isn’t always better,” says Ms Donnelly, who adds that some funds prefer
independence so they have the option of investing in small projects.
“Some local pension funds want to invest in opportunities closer to home,” she says.
“A
lot of those are small – we’re talking a few million. A pool won’t
write a cheque for less than £100m – they’re not going to want to look
at those opportunities. But they still deliver benefits for the UK in
terms of productivity.”
George
Graham, the director of the South Yorkshire Pensions Authority, adds
that any deal-making would not be popular with funds.
“Clearly, those who are responsible for existing funds don’t want to give up that responsibility,” he says.
“But also, any form of merger in business, is time-consuming and costly.”
Alright, let me be very brief in my comments and get to it.
I wholeheartedly agree with Chancellor Rachel Reeves, it's high time the UK creates one mega pension fund (or a few of them like in Sweden) and consolidates the 86 local government pension funds in England and Wales.
That's a huge step and it will be met with vigorous challenges from entrenched groups that benefit from this ridiculously fragmented system.
But if they are successful, and I would impose this by law, that's just the beginning.
They then need to get the governance right to make sure there's no government interference whatsoever in the day-to-day operations of this new mega fund or funds.
That is critical if they want these large pension funds to succeed in investing across public and private markets and attracting talent to internalize most of the investment operations.
Stated differently, without the proper governance, don't bother trying to copy the Canadian model in the UK or elsewhere in Europe.
And that can be tricky in the UK and Europe where governments like o intervene more.
Anyway, we shall see how far this idea goes but I'm all for it in principle as long as they get the governance right, and never mind the Thames Water debacle (you will always have losers when investing).
There's no reason whatsoever why the UK or the US for that matter can't create Canadian-style pension model as long as they get the governance right and keep politics out of pensions.
Below, Rachel Reeves is set to announce the “very tough decisions” the Treasury will take to address a public spending black hole of around £20 billion in the government accounts.
In a speech in the House of Commons, the chancellor will accuse the previous Conservative government of “covering up the true state of the public finances” as she revealed the results of the Treasury spending audit she commissioned.
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