As an incentive for pension schemes to invest more in the UK, former pensions minister Baroness Ros Altmann has suggested making tax relief dependent on domestic allocations. Business and finance journalist Geoff Ho explores her idea and gathers expert reaction.
Speaking at the annual Mansion House dinner in July, chancellor Rachel Reeves expressed confidence that most major defined contribution (DC) pension schemes and providers had pledged to invest in UK private assets.
With the public finances increasingly constrained, the government has been looking for ways to boost investment in the UK. Under the Mansion House accords, DC pension fund providers have committed to investing 10% of their cash in infrastructure and other “growth assets”, with half of that going to projects in the UK.
However, others – including former pensions minister Baroness Ros Altmann – believe this is not enough. She argues that, to really get pension funds to increase their investment in the UK, the Treasury should make investing 25% of new contributions into UK growth assets like domestic equities, infrastructure and other alternatives the ‘quid pro quo’ for continuing to receive tax relief.
“Bonds do not match liabilities, and if you believe in capitalism, then you should believe that equities will outperform bonds.”
Ros Altmann
Baroness Altmann argues that, if UK pension funds and savers diverted money away from fixed income, overseas equities and index funds, the money would benefit the domestic economy by giving domestic businesses greater access to capital.
Additionally, she says the money would help revive the flagging London market for listed equities, which is losing existing listings and new companies to rivals such as the New York Stock Exchange, as well as to private equity buyouts.
The former pensions minister adds that investing in domestic equities and alternatives should generate the excess investment returns that pension schemes need to meet their liabilities and investment objectives.
She argues: “Bonds do not match liabilities, and if you believe in capitalism, then you should believe that equities will outperform bonds.”
‘Not pension schemes’ job to revive London markets’
However, many observers believe that, were the Treasury to make tax relief dependent on investing money in UK assets, it could leave pension fund trustees exposed if those investments underperform.
Claire Carey, partner at law firm Sackers, says: “Occupational schemes have their bedrock in trust law and trustees have a duty of care to act in members’ best interests. Their obligation is to their members and making sure they get the best outcomes for them and their beneficiaries.”
RSM’s Ian Bell, head of pensions at the accountancy group, adds that members of defined contribution schemes would need greater financial education to be able to weigh the pros and cons of allocating to UK assets and chasing the tax relief.
“You’d be asking DC scheme members to take on more investment risks, and they would have to be comfortable with that,” he says. “The majority of the population does not have the knowledge to make those decisions. The education piece is vital.”
“You’d be asking DC scheme members to take on more investment risks, and they would have to be comfortable with that.”
Ian Bell, RSM
One pension fund trustee and asset management consultant – who declined to be named – says that, while he has sympathy for Baroness Altmann’s idea, “it is not my job to spend members’ money on reviving the London Stock Exchange”.
He added: “There’s a diminishing universe of investable UK equities thanks to private equity. They bought good companies, loaded them up with debt, then dumped them back on the market, and we saw them struggle or go bust. And you want us to give those private equity guys more of our money?
“Why would I put our money into a market with fewer potential winners? That is not compatible with ensuring my members have enough money to be able to retire.”
“It is not my job to spend members’ money on reviving the London Stock Exchange.”
Pension scheme trustee
Foreign competition and its effects on UK markets
Aside from Baroness Altmann’s tax proposal adding extra complexity to the tax system and placing a greater reporting obligation on individuals, RSM’s Bell says UK-based pension funds and savers still have to compete with deep-pocketed foreign investors.
“How do you make sure you give the opportunities to UK pensions over foreign ones? Why wouldn’t Australian or Canadian pension funds want to jump on the bandwagon?” he says.
The pension fund trustee adds that they are averse to investing in UK infrastructure because “no project has ever come on time and on budget in this country”. They add: “I remember PFI [private finance initiative] projects. No thanks.”
Bell adds that investing in alternatives such as infrastructure can be extremely risky for some pension fund investors as there is no guarantee of capital growth or other returns, and the potential for loss is much higher than with other assets.
“If you look at Thames Water, a big Canadian private equity pension fund can afford to take a loss on that – UK pension savers can’t,” he contends.
Continuation of tax relief ‘not a given’
Baroness Altmann has little time for those who argue for the status quo. She says her proposal is not mandating a 25% allocation to UK growth investments: “If you think other markets will do better, fine. But why build up other economies and not our own when you have help from the taxpayer?”
“How long does the industry think that UK taxpayers will continue to foot the bill? If nothing changes, at some point we are going to lose it.”
Ros Altmann
At the launch of the Pension Commission last month, pensions minister Torsten Bell said the tax system was not in scope of the review and added that, despite its cost, it was “a good thing” and “a strong incentive for saving”.
However, Baroness Altmann says that with the national debt at nearly £3trn and government borrowing at near record levels, the continued existence of pensions tax relief is not a given.
“The government currently spends £70bn a year on pensions tax relief – that’s more than the defence budget,” she says. “How long does the industry think that UK taxpayers will continue to foot the bill? If nothing changes, at some point we are going to lose it.”
