Insurers could scale back a £100 billion ($126 billion) pledge to invest in infrastructure and startups if the British government pushes pension funds to consolidate in its wide-ranging reforms of the sector.
(Bloomberg) — Insurers could scale back a £100 billion ($126 billion) pledge to invest in infrastructure and startups if the British government pushes pension funds to consolidate in its wide-ranging reforms of the sector.
Firms are worried about losing business under ideas to encourage pensions to combine into a government-overseen fund rather than using insurers to backstop their liabilities, industry figures said, asking not to be named discussing sensitive issues.
If opportunities for insurers to take on more UK company pensions are limited as a result of the reforms, they may not be able to stick to the Association of British Insurers’ commitment made in November to inject more capital over ten years into areas that would drive economic growth.
The row is among several rifts between those involved in trying to direct more of the UK’s £2.5 trillion pensions pool into domestic projects, boosting London as a financial center and lifting growth.
Chancellor Jeremy Hunt, who met with pension industry leaders on Wednesday, plans to make pension reforms a key feature in his Mansion House speech to City grandees on July 10. Given the complexity of the issues, he is likely to launch consultations that could be developed further in the Autumn Statement, rather than announce a firm set of proposals, according to officials.
‘Unfair to Insurers’
Both the ruling Conservative Party and opposition Labour Party are keen to shake up pensions to boost investment in the UK while also addressing the need for people to save more for retirement.
Under proposals put forward by the Tony Blair Institute and others, some of the UK’s thousands of defined benefit pensions — which pay a guaranteed sum in retirement — could be rolled into the Pension Protection Fund, which is currently used as a lifeboat for failing funds, or merged to create larger entities.
According to supporters, combining pensions in this way would enhance returns by giving them access to more sophisticated management and complex investments.
But it would also reduce the number of companies seeking to pass on their pensions to insurers to manage through buy-out deals, industry figures believe. There is already a functioning market for buy-outs, so introducing significant reforms potentially underwritten by taxpayers would unfairly hit the companies involved, they added.
Buy-outs are expected to see huge growth in the next few years as rising interest rates improve pensions’ funding levels, making deals more affordable. Insurers took that expected growth into account when calculating that they could invest £100 billion in infrastructure assets, industry figures have told government officials. The ABI did not comment.
“Some solutions being considered could, if broadly implemented, be unfair to insurers,” said Steve Webb, a former pensions minister who is now a partner at consultancy Lane, Clark & Peacock. But there are options that would not harm insurers’ opportunities, such as putting more stressed pensions into the PPF or, at the other end of the spectrum, allowing successful funds to pay for extra insurance via the PPF to widen their investments into more equities, Webb said.
Hunt may also raise the prospect of greater consolidation among local government pensions, an area that is seen as more straightforward.
This dispute has emerged alongside another row about whether the government could force pension funds to hand over a portion of their assets to be invested in startups and other growth assets. Asset managers and some politicians have pushed back against any mandatory direction of funds, but others believe it would would be necessary to get investment off the ground.
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Meanwhile, several large pensions are pushing back against the Financial Conduct Authority’s plans to loosen listing rules to make the UK a more attractive venue for companies.
–With assistance from Joe Mayes.
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