King’s Speech

Baroness Drake Excerpts

Monday 13th November 2023 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I reference my interests as a trustee in occupational and master trust pension funds. Pension funds have moved up the political agenda, as the Government focus on them as generators of investment for growth and net-zero infrastructure. The City sees them as potential inflows to make up for those lost by Brexit and to maintain its economies of scale and competitiveness.

In his Mansion House speech, the Chancellor set out proposals to support growing the economy through directing investment from funded private and public pension schemes into productive assets, including private equity and new businesses. He set out three golden rules: to secure the best possible outcomes for pension savers, with any changes to investment structures putting their needs first; to prioritise a strong and diversified gilt market, recognising its importance in debt funding to government; and to strengthen the UK’s competitive position as a listing destination and leading financial centre.

Alignment of the UK’s economic growth with the interests of millions of workers’ pensions savings is an aspiration clearly to support. How that alignment is achieved is where the challenge lies—how conflicts of interest are reconciled, who benefits, who bears what risks, the governance in investment structures and the governance of political decision-making.

Greater state intervention into the investment of private savings is being prepared. The prospect of government mandating how assets are invested was trialled in the December 2021 letter signed by the then Prime Minister and Chancellor. Political mandation would supplant fiduciary duty in investment decisions. Once that precedent is set in law, a Pandora’s box opens up on the extent and specificity of subsequent government mandates imposed on private assets. Mandation poses many problems, including undermining public confidence in auto-enrolment. It would be better for government to create the right conditions for attracting investment in productive finance, and the capital will follow.

As to those conditions, in the large funded public schemes, such as local government, the Government have greater powers to influence, but most private defined benefit schemes are closed. By the end of the decade, over half of their assets and liabilities will have been bought out by insurers. The remaining closed schemes will be cash-flow negative. The decline in DB pension savings, the drive to productive investment and the negative shift in market sentiment raise important questions for the future gilt market—no wonder they form part of the three golden rules that the Chancellor set.

Through automatic enrolment, funds in DC schemes will rise to well over £l trillion by 2030 and continue to grow, in effect providing capital of the future. The Mansion House aspirations expose the inefficiencies in our highly fragmented private pension market. Little is in the gracious Speech, but the Autumn Statement may address how to consolidate and scale up workplace pension schemes and how to get them to invest in start-ups and desirable infrastructure.

Consolidation to create scale is necessary to enable lower costs, better governance and increased investment capacity and capability. However, the Government must also address other inefficiencies, such as the existence of many millions of disaggregated small pension pots, which are inhibiting long-term investment. The assumption that more illiquid, higher-risk investments will produce better outcomes for savers comes with many dependencies, not least charges. In its new value assessment framework for pension funds, the Treasury chose a gross, rather than a net, investment performance metric. This is deeply disappointing, and in my view fails the Chancellor’s golden rule spelled out at Mansion House.

The Government have to facilitate the investment opportunities and the structures and governance that enhance investment, growth and value for savers. For example, in Australia, master trusts set up collectively owned vehicles to invest in their start-ups. Major Canadian and American pension schemes have taken similar ownership steps with private equity and investments. But our economic growth requires capital from both overseas and UK investors. As my noble friend Lord Livermore stressed, that requires government to set long-term economic policy, provide the consistency needed for investor confidence and adhere to high standards of governance in decision making. These requirements have not been met in recent years.