Experts dismiss national pension fund proposal

Espoused in a blog by Jim Osborne, a Scottish lay trustee for many years, he advocates creating a National Pension and Investment Fund, starting by amalgamating public sector funds.

He says: “Once public sector funds have been consolidated, then the resulting fund will act as a powerful magnet attracting funds from defined contribution schemes as members transfer from useless DC pensions into a state-sponsored defined benefit scheme.

“Employers will jump at the opportunity to offload their obligations to fund DB fund ‘deficits’ and the investment risks they bear into the NPIF. Its existence will thoroughly transform our pensions system.”

The idea – or perhaps more accurately, dream – of a UK sovereign wealth fund has merit, not least for the potential to provide better state pensions

Ian Neale, Aries Insight

Osborne explains that the new fund would be able to direct pension fund capital towards “real wealth creation through the production of useful things”.

The aim would be “to pool investment risk across society as a whole”, since neither individual employers nor workers have the “capacity to manage investment risk”, he notes, adding that it would likewise contribute to eliminate longevity risk, as most DB schemes are likely to outlive the majority of businesses.

Experts scorn lack of detail

As several commentators point out, the blog is sketchy on detail, devoid of any semblance of actuarial calculations, and ignores immense practical difficulties in any shift towards nationalising pensions.

David Robbins, senior consultant at Willis Towers Watson, points out several inconsistencies of the proposal, such as the ultimate aim of the fund, which is “to amalgamate Pillar II pension funds in order to pay earnings-related pensions to all citizens”.

Robbins says: “Is the proposal that the assets of pension funds be confiscated in order to pay benefits to a much bigger population?

“If so, what benefits — if any — would people get in respect of past years when they did not have active service in a DB scheme? Would benefit haircuts be applied to those who did to make this add up, or does the focus on cash flow mean that this can would be kicked down the road?”

The blog details that after Local Government Pension Scheme funds have been consolidated, the fund will attract funds from DC schemes as members transfer into it.

Robbins says: “This seems to imply that transfer is voluntary, at least for DC savers. Even those who would prefer a state-backed DB promise to a flexible DC pot would only transfer if the terms were attractive enough, which seems to rule out using their funds to help pay pensions to ‘all citizens’.”

He notes that Osborne mentions that “employers will jump at the opportunity to offload their obligations to fund DB fund deficits”, which again suggests a voluntary decision from sponsors.

“It’s not clear to me whether the terms on which existing DB entitlements would be converted into pension rights from the new scheme would depend on how well-funded the ceding scheme was, and therefore whether employers who have devoted considerable sums to repairing deficits would have just thrown money away,” Robbins says.

Ian Neale, director at Aries Insight, has sympathy with some of Osborne’s thoughts: “The idea — or perhaps more accurately, dream — of a UK sovereign wealth fund has merit, not least for the potential to provide better state pensions.”

He points to recently published analysis of OECD data by The Investing and Saving Alliance, which showed “the UK’s ratio of pension income to pre-retirement earnings is currently 28.4 per cent, less than half the OECD average of 58.6 per cent”.

However, Neale notes that Osborne’s idea is destabilised from his starting point, as he fails to realise that “public sector pension schemes are unfunded, with the notable exception of the LGPS”.

He added: “Public awareness is lacking that collectively taxpayers are on the hook for £1.76tn future pension liability, which represents an extra mortgage of £60,000 on each of the 30m UK households.”

Consolidation is the name of the game

“There is clearly a case for scale in pension fund investments, but the main funded public sector scheme, the LGPS, has already taken big strides in that direction,” says former pensions minister Sir Steve Webb, who is now a partner at LCP.

“If we are concerned about what pension funds invest in, we should investigate the barriers to investment in things like infrastructure and tackle them at source, rather than somehow ‘nationalise’ private sector pensions.”

Steve Simkins, partner at Isio, argues that “Osborne is pushing consolidation to its limits”, and notes that wile consolidation is good, “because it reduces costs and improves governance”, it does not necessarily produce the best outcomes if “it imposes one-size-fits-all requirements such as investment strategy”.

He gives the example of the Universities Superannuation Scheme, “a consolidator which efficiently delivers pensions for many employers, but is struggling to manage its cross-subsidies as the universities sector diversifies”.

Pensions Expert has reported that the last USS valuation showed the deficit quadrupling to more than £14bn, as a consequence of which employers would need to increase their contributions from 30.7 per cent and 42.1 per cent of payroll.

Simkins adds: “The only way Osborne’s suggestion would work would be for the government to take on and guarantee employer liabilities and member outcomes, as well as the assets.

“This sounds like a new second state pension, notionally backed by a sovereign wealth fund. Despite the challenges, the government might be interested in the immediate release of cash.”

Penny Cogher, partner at Irwin Mitchell, notes that this type of idea “has been kicking around for a few years now”.

She explains that nationalising DB pensions is attractive from both the employer and member perspective, since “the employer can delink itself from the dead chain of past DB pension liabilities and members get the security of knowing their benefits are ‘backed’ by the government”.

Proposal is a ‘paradigm shift’

Osborne, who served as a pension trustee of a medium-sized private sector pension fund for seven years, notes that his blog is “a synopsis of a much longer paper, which is itself a compressed expression of the various ideas I have been working with for at least the past eight years”.

“A short synopsis cannot hope to cover all the angles and is bound to be ‘sketchy’,” he says.

Osborne adds: “It is important to recognise that my ideas constitute a paradigm shift. Scientists once believed the sun went around the earth until, eventually, Copernicus proved otherwise, so I am not by any means the first ‘maverick’ to face a wall of criticism and hostility.

“The course of history encompasses many paradigm shifts and moments of dramatic change in ideas.”

Addressing the criticism that his blog lacks actuarial calculations, he notes that these will not be “of such importance in this different paradigm”.

He says: “I refute the suggestion that the practical difficulties are immense — what is immense is the resistance to change. As they say, ‘where there is a will there is a way’.

“The statistics are stark — our financial system, of which pension funds are an enormously important part, has singularly failed to deliver a thriving, productive economy, has accelerated social inequality and has dismally failed to rise to the challenge of the transition to a zero-carbon economy.

“At the same time, investment risk has been transferred from employers to employees as a result of the closure of final salary schemes and the growth in DC pension schemes,” Osborne continues.

“Neither businesses nor employees have the capacity to carry these risks, so the proposals begin with the proposition that these risks need to be borne collectively, which means the risks must ultimately be borne by the state. This can be done through institutional solutions which do not constitute ‘nationalisation’.”