King’s Speech (4th Day)

Baroness Drake Excerpts

Monday 22nd July 2024 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I declare my interest as a trustee of DB—defined benefit—and master trust pension schemes.

The Government’s mission to deliver sustained economic growth conveys an energy and purpose that I truly believe the country needs. Investment in the UK has been too low. The perception of government instability has made Britain a less attractive place to invest in. Restoration of good governance and stability of policy will be integral to increasing that investment.

Reinvigorating our capital markets is triggering a review of our pensions industry, now worth over £2 trillion. Some £1.2 trillion is in closed DB schemes. Consequent to auto-enrolment, there is projected to be £800 billion or more in DC—defined contribution—schemes by 2030. Private DC may overtake DB pension savings within 10 years; more so if the statutory minimum auto-enrolment contributions are increased.

That reality raises major issues of policy as to the appropriate governance and regulation applied to those private savings, which are supported by £50 billion plus per annum in different forms of tax relief. The pensions sector is a major allocator of capital, which can negatively affect the efficiency of the wholesale financial markets, markets that are key to driving innovation and investment in our economy. We have deep savings pools, yet reduction in investment in the UK.

Closure of DB schemes led to a focus on guaranteed long-term cash flow away from growth investments, as increasingly beneficiaries became pensioners in payment. Now we see scale buyouts of DB schemes to insurers. The regulatory focus on the DC pension sector’s ability to deliver best value for millions of individual savers is gaining momentum.

Both improving the outcomes for UK citizens saving for retirement and achieving sustainable economic growth requires a clear journey plan. The pension sector’s role as a major allocator of capital will come increasingly from defined contribution schemes and the £360 billion in the local government pension scheme.

The need to identify and address the barriers to pension schemes investing more in UK productive assets is captured in the first stage of the Government’s overarching pensions review.

DC private pension provision is not a normal market; the demand side is driven by a public policy of harnessing employees’ inertia and compelling employers. The investment risk is borne by the individual saver, and their interests cannot be overridden, but structural reform to achieve greater consolidation in the market is needed to secure the essential benefits of scale to enable larger schemes to deliver higher returns for savers and invest more in UK productive assets.

The Government need to incentivise a quicker pace of consolidation in the market and create the right investment environment to secure better outcomes for both savers and the economy. The many millions of inactive small pension pots, arising when workers leave their employer, need to be addressed. Previous Governments knew that this was a growing problem, increasing costs and inhibiting illiquid investments, but they have not acted. The Government’s move to automatically consolidate these small pots is much needed.

When it comes to retirement, our citizens are not well supported in making the complex decisions about how to access those savings over their retired lives—a problem not only for individuals but for public good outcomes—so it is good news that the Government intend to require trustees of pension schemes to offer people retirement income solutions or a default option when they stop work, not just to hand over a pot of savings.

The UK economy faces a world of innovation in sciences and technology where other leading economies are investing heavily in infrastructure and the industries of the future. Securing a deep science and technology base is essential to our economic prosperity. Annual investment in energy globally rose to £2.4 trillion in 2022, with approximately three-quarters of that growth attributed to low-carbon technologies. In the UK, the technology sector is less than 5% of our total market capitalisation.

Public investment where it supports and de-risks additional private investment is being deployed successfully across the world. The creation of a national wealth fund and investable opportunities, with the target of attracting £3 of private investment for every £1 of public investment, is an important move. Yes, it may be a modest start, but it is an essential one in order to get the investment this country needs to achieve sustainable economic growth.