Everyone agrees our pension system is in crisis – “so, what is the solution?” they ask. And therein lies the problem.
Labour, should they become the Government tomorrow, has announced that they will conduct an immediate review of the UK pensions landscape, both to improve outcomes for savers and increase investment in UK markets. The party is asking the right question, but it would be a mistake for them to rush to a simple (simplistic) solution.
Radix Big Tent’s just published pamphlet ‘From Pensions to Prosperity’ is an attempt to help the new Government re-frame the discussions around pensions and the estimated £6 trillion sitting in UK retirement savings. At present, these funds are pretty unproductive and not particularly helpful to the UK economy or the quality of life of its citizens. Which is why, for decades, successive governments have seen tax relief on retirement savings as a fiscal cost rather than as a route to the country’s economic success.
The reason we are in today’s mess is because previous governments have looked for ‘quick fixes’ rather than seek first to understand what should be the overarching objectives of the pensions system as a whole. As a result, we have had multiple shoot-from-the-hip changes to the UK retirement savings system, each trying to address this or that specific issue, each with unintended consequences, creating perverse incentives and further complicating the system.
We tend to become enveloped in the numbers, stupefied by the technical details, and captured by the financialization of the whole system; ending up unable to see the wood for the trees.
In the 1990s, Gary Hamel and CK Prahalad identified this same issue within corporations. They argued that multiple, disjointed changes within corporations over a long period of time all seem reasonable at the time they are enacted. Yet the cumulative effect had been systemic dysfunction. They suggested that the time then comes when there is a need for Business Process Re-Engineering – stepping back, looking at the system as a whole and re-engineering the whole thing.
Radix’s pamphlet is an attempt to start that same process for the retirement savings system. Because, as Professor Sir John Kay puts it in his Foreword, “Pensions represent the greatest avoidable disaster in British economic policy over the last three decades.”
And it will continue to be just that if we simply move on to the next finger-in-the-dyke ‘solution’ to what is a system level set of issues.
In the pamphlet we suggest that “There is nothing that will bring greater benefits both to funds and their members than a healthy UK economy that grows sustainably.” The objective of the pensions system should be to help create a virtuous cycle centred around economic growth.
Further, in a fiscally constrained environment, the new government cannot possibly hope to deliver on promises of economic growth unless it manages to mobilise retirement savings for the benefit of the UK economy.
Achieving such a re-focusing of retirement savings will be neither simple nor straightforward. But it is essential.
First, Labour will need to make clear what economic goals it wants to achieve through the pensions system. It needs to be far more directive towards the pensions regulators to ensure that the regulatory system is structured to achieve those objectives. Forcing a move away from the terminal risk-aversion that plagues regulators everywhere and that is leading us inexorably towards the stability of the graveyard.
It will also have to do much better at making UK investments more attractive to private investors – be they infrastructure investments, investment in training and development, investment in early and mid-stage companies, and any other investments that have the potential to drive economic performance and productivity.
Well-executed, these changes will inevitably drive pension funds towards an investment pattern that is different from the dull and unproductive investments we see today. It will also move UK funds away from the shocking (unjustified and unexplained) anti-domestic bias in their current investment portfolios – a situation that makes the UK a stark global outlier.
While all this may seem like a daunting task, there is much that can be built on. From the work done by the impact investment community to the investment pattern already seen today with some pension and investment funds, it is clear that pathways forward do exist. The challenge is to identify those pathways that are politically and practically viable and then act forcefully to ensure they are opened up.
The form and remit of Labour’s Pension Commission may seem a technocratic concern, but it will tell us a lot about whether the new Government’s is thinking seriously about turbo-charging growth or simply rearranging deckchairs…
