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The Labour party will conduct a sweeping review of the UK’s pension system to find ways of unlocking billions of pounds worth of retirement fund capital for the country’s growth if it wins the next general election, shadow chancellor Rachel Reeves has said.
Speaking a week before the Autumn Statement, Reeves unveiled a series of measures that went further than proposals set out so far by chancellor Jeremy Hunt to boost British long-term pension investment in UK businesses.
The UK pension market is among the largest in Europe and worth about £2.5tn, according to government analysis. However, British pension funds have largely shunned UK-listed equities and small unquoted companies in favour of offshore markets and domestic gilts.
Reeves said on Monday that if Labour won power, it would review the entire pensions landscape to ensure it delivered “full potential” for savers and companies. This would range from private sector defined contribution (DC) and defined benefit schemes to local authority pensions.
“The economy is not working — growth is the missing ingredient of this economy,” Reeves told reporters, setting out plans to get “better returns for pension savers and [drive] more capital into fast-growing businesses”.
Her comments indicate a growing political consensus around the need to find new ways of channelling savings into companies that could drive up the UK’s moribund growth rate.
With the election drawing nearer, both Labour and the Conservatives are leaning heavily on the private sector to boost investment as they confront badly strained public finances.
In addition to a system review, Reeves unveiled plans to go further on several current government policy initiatives aimed at steering more pension cash into the UK economy, including stronger powers for the regulator to drive out poorer-performing pension schemes.
In July, Hunt unveiled the so-called Mansion House compact, committing nine of the UK’s largest DC pension providers to the target of allocating at least 5 per cent of their “default” — or most popular — funds to unlisted equities by 2030.
Hunt hopes it will deliver roughly £50bn in DC cash for unlisted assets, such as unquoted companies, which are potentially higher returning but higher risk, by 2030 if the wider sector follows suit.
Labour wants to “build” on his reforms by establishing a state-backed scheme for DC pension funds to invest a proportion of their assets alongside the British Business Bank, the state-owned economic development investor, into UK growth assets.
Hunt’s compact did not specify signatories to invest in the UK, which Reeves described as a “missed opportunity”. Significantly, Reeves did not propose to force funds to invest in UK assets, saying: “I don’t think mandating is the right thing to do.”
Labour did not announce a target for pension investment in the UK, but unions welcomed the drive to steer more pension investment into the domestic economy. The party estimates its reforms could enable an average saver to earn an extra £21,000 to £37,000 in retirement income.
The Trades Union Congress, the umbrella body for the UK’s trade union movement, said: “The lack of measures in the Mansion House proposals to ensure that extra money allocated to ‘productive finance’ was invested in UK companies and projects was one of their biggest flaws.”
“If workers’ pension contributions were channelled into investments that give them better returns and boost the UK economy, it could be a win-win,” it added.
Reeves also accused the government of hitting working households with tax increases and presiding over a weak economic performance, with the Bank of England forecasting zero growth next year.
The Institute for Fiscal Studies think-tank has forecast that UK tax revenues will hit 37 per cent of national income next year, when the election is expected, compared with 33 per cent at the time of the last poll in 2019.
Labour is accusing the Conservatives of pushing through 25 tax increases in the current parliament, including raising the main rate of corporation tax and freezes to income tax and National Insurance thresholds.
“More taxes is not the way to grow the economy — my priority is easing the burden of taxes on working people,” Reeves said, adding that she would “not make any promises to cut taxes unless I can say where the money is going to come from”.
In response, a Tory official said Labour did not have “a leg to stand on” given the tax increases when it was last in government, and that the party’s borrowing plans “will almost certainly lead to higher taxes for working people”.