Rachel Reeves is set to announce this evening plans for pension “megafunds” aimed at unlocking PS80bn in investment. Business disquiet over the Budget costs to employers has grown.
She will outline a major overhaul of the pension system in her first Mansion House address to the City of London. This is the biggest reform of pensions that the UK has seen for decades.
It is believed that the investment would be beneficial to energy infrastructure, technology start-ups, and public services. Reeves claims that the UK public pension funds are too small to provide good returns for British investors.
Next year, the government will introduce legislation that will combine funds managed by 86 local pension schemes. By 2030, the combined schemes of England and Wales will have assets totaling about PS500bn. The level of contributions for workers will remain unchanged.
The government could also merge defined contribution schemes within the private sector. This will allow them to manage assets worth PS800bn by the end decade.
Currently, 60 multi-employer schemes invest the money of savers. The government will consult about setting a minimum requirement for these funds.
Reeves’ plans are based upon similar schemes in Australia, Canada and the United States where pension funds use their size to invest more in assets with higher growth potential.
Reeves stated: “Last months Budget laid the foundations for economic stability. We’re now going to go for growth. This starts with the largest set of pension reforms in decades, to unlock tens and tens billions of pounds in investment to boost people’s retirement savings and drive economic development.”
Zoe Alexander is the director of policy and advocacy for the Pensions and Lifetime Savings Association. She told The Times that the reform proposals were a step in the right direction towards making sure our system offers the best value to savers.
We support consolidation when it is in the members’ best interests and provides value for money.
Michael Aherne, partner in Herbert Smith Freehills’ pensions group, told Reuters that the plans alone wouldn’t achieve her main goal of increasing pension investments. He added that it would also need to be coupled with “increased sophistication in investment and governance” to credibly deliver a better outcome, both for scheme participants and UK plc.
Aherne said: “The proposed size requirements for mastertrusts are new, and they will be controversial. Many master trusts currently operate successfully with assets that are well below the thresholds of PS25 billion and PS50 billion, which is what the chancellor has in mind.
“Subject only to this important point, I think the direction is positive.” The government seems to realize that it is a systemic problem and will have to deal with key issues like increasing the minimum pension contribution level, improving UK plc’s competitiveness, and simplifying planning reform.
Employers’ concerns
Business leaders told Reeves measures in the budget, notably the increase in employer’s national insurance contributions, would slow down growth. In a draft of a letter to Reeves, the British Retail Consortium stated that its members will not be able absorb these costs.
The report said that “the sheer magnitude of the new costs and their rapid occurrence, along with the costs of a number of other regulations, creates a cumulative burden which will lead to job losses and price increases.”
From April 2025, the rate of employer’s National Insurance Contributions (NICs), will rise by 1.2 percentage point. The employers’ costs will increase due to the lower threshold. Employers will now be required to pay NICs based on employee earnings starting at PS5,000, instead of the current PS9100 threshold.
From April, the national living wages will increase 6.7% to PS12.21 an hour. The national minimum wage for 18-20-year-olds is set to rise 16.3% to PS10 an hour.
CBI response
Rain Newton-Smith echoed BTC’s concerns. She said, “There is a lot disquiet among the business community about whether this government will be able to focus on its growth mission.” You can see that the Budget has made decisions which will affect business investment in the coming three to five year period.
Chief executives are saying that the budget measures will make it more difficult to decide whether to invest in Britain. The focus of business leaders is on long-term Infrastructure… but I do not see a real plan for growth in the next three to 5 years. “I think this has taken the business community completely by surprise.”
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