Labour willing to force pension plans to invest in £50bn ‘growth fund’

Labour is ready to force pension funds to invest in a proposed £50bn “future growth fund”, as the party aims to boost the amount of capital available for fast-growing UK companies.

Rachel Reeves, shadow chancellor, said she did not believe Labour would need to mandate retirement schemes to invest in the new fund because of the goodwill in the sector, but added: “Nothing is off the table.”

Speaking to the Financial Times on a three-day visit to the US, she said she also wanted to accelerate the merger of smaller UK pension funds so as to consolidate a fragmented market.

Reeves, who visited the New York Stock Exchange on Monday, said she wanted to change the culture of Britain’s savings industry, unleashing homegrown funds that could persuade UK companies to list in London.

She also wants pension funds to work alongside the state-owned British Business Bank to improve the UK’s “start up, scale up” landscape, with Labour warning that the country is trying to do “capitalism without capital”.

Reeves said: “A lack of confidence in Britain’s economy has led to too many businesses leaving our shores.”

Jeremy Hunt, chancellor, is grappling with the same issues and is expected to set out his own proposals to channel more of the UK’s retirement savings into higher risk ventures in his Mansion House speech in July.

In New York, Reeves will meet business leaders and political strategists including Joe Biden’s pollster John Anzalone and former Barack Obama adviser David Axelrod.

She will later travel to Washington for meetings with Biden administration figures and also give a speech in the US capital setting out Labour’s economic vision for the UK.

Reeves backed the proposal by Nicholas Lyons, lord mayor of the City of London, to create a £50bn growth fund, with 5 per cent of every defined contribution scheme’s assets invested in it.

Lyons has said pensions schemes should be forced to make contributions to the fund and Reeves said she was open to this idea, although she believed the goal could be met on a voluntary basis.

The Pensions and Lifetime Savings Association, a trade body, said last month it opposed any move to take away full investment freedom from retirement scheme trustees.

Reeves wants to improve Britain’s economic growth potential by consolidating Britain’s highly fragmented pensions market — with roughly 28,000 defined contribution retirement schemes — along Canadian or Australian lines.

The UK government is already pushing for consolidation of the market, although progress has been slow.

Smaller retirement schemes with £100mn or less in assets and which perform poorly against other funds on charges and investment returns are expected to wind up or merge, and the pension regulator has been given powers to force consolidation.

Reeves’ plans would push smaller pension funds to merge to create the scale needed to take on new investments, and include giving the regulator more powers to consolidate the sector.

The shadow chancellor said she believed retirement schemes 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 added.

Reeves argues some UK companies ultimately move abroad because they have had problems attracting domestic funding at an early stage.

Average allocation to UK equities by UK defined benefit pension schemes has fallen from around 50 per cent in 2008 to around 10 per cent today, according to data from the Pension Protection Fund, the body which serves as a safety net for retirement savers when companies become insolvent.

Labour points to high profile businesses, including UK-based chip designer Arm, which have announced plans to list in New York.

Labour would meanwhile create a framework to allow pension funds to invest in promising new businesses alongside the British Business Bank, which would carry out relevant due diligence.

Reeves backs Hunt’s plan to reform EU-era Solvency II rules, intended to clear the way for funds to invest in infrastructure projects, but said: “They’ve been talking about it long enough — they need to do it.”

Andy Briggs, chief executive of Phoenix Group, the insurer, said there was “an exciting opportunity” for companies in the sector to invest in a broader range of assets with an “attractive long term return profile” but added it was critical to have a pipeline of opportunities.