#10 Inside Labour: Unlocking pensions, fuelling growth
Last week, I spoke at an event hosted by TheCityUK and made the case for why this government should leverage Defined Benefit (DB) pension funds to boost investment in infrastructure.
Rachel Reeves has already correctly identified reforms to Defined Contribution (DC) pension funds as crucial to Labour’s growth mission.
But last night, the government confirmed that the Chancellor will also use her growth speech tomorrow to announce reforms to unlock pension surpluses held in DB schemes.
This is welcome news and shows just how serious this government is about going for growth.
Pension surpluses have created “diamond-plated” schemes
Regulation of DB pensions must protect members’ pensions. Protecting pensions is a cornerstone of retirement security, and rightly so.
But the current regime of ultra-regulation has downsides too. Among them is employers often allocating more money than necessary to these schemes.
Higher interest rates have caused many of these schemes to accumulate significant surpluses. As one pension policy expert told me, this has essentially turned DB pensions, already considered “gold-plated,” into unnecessarily “diamond-plated” schemes.
The consequence of this is resources that could be used for investment are effectively diverted to increase wages or contribute more generously to the DC pensions that now dominate the workplace.
In short, today’s workers who often lack the generous guarantees of DB schemes, lose out.
Loosen restrictions to go for growth
The second issue is how these pension schemes, especially DC, invest.
A fragmented landscape of small pension schemes means schemes are too conservative and avoid investing in unlisted UK equities infrastructure or long-term growth projects.
Instead, they invest in liquid assets like bonds and tracker funds, which offer less potential for economic returns. This cautious approach reduces pension fund returns and deprives the UK economy of significant investment in areas such as green energy and infrastructure.
By loosening restrictions, schemes could allocate funds to long-term growth opportunities. While this carries some risk, bold measures are needed to get our economy back up and firing.
And, with a sensible framework in place, the Chancellor could boost growth and reduce the burden on employers.
The Tories shied away from pension reform when they were in government, and the underinvestment in our infrastructure is plain to see.
The public gave their verdict on that legacy in July and put their faith in Labour to fix the mess and rebuild Britain. These reforms are only a part of the puzzle, but they are as clear a sign as any that they are repaying that faith and getting on with the job at hand.
Jonathan Ashworth
Chief Executive, Labour Together
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