Starved of a genuine strategy for economic growth, the government is again looking for a favour from the world of pensions. The best example is the establishment of the Pensions Infrastructure Platform by several large pension schemes, to direct additional funds into infrastructure investment, at the government’s behest. This is a worthwhile endeavour by the schemes themselves, but the government is desperate that it also makes up for its own failings on capital investment.
We now have another example, with the Pensions Bill likely to compel the Pensions Regulator (TPR) to consider how its defined benefit pension funding regime can ‘minimise any adverse impact on the sustainable growth of an employer’.
This is a hugely controversial measure. Pension scheme members have a strong interest in the sustainability of their employer, but it is the reference to sustainable growth that is problematic. Will TPR be asked to consider the employer’s need to generate profits for shareholders over their duty to make contributions into their pension schemes?
If this is an attempt to ensure pensions regulation chimes with a general economic good, as both the government and TPR have suggested, then it represents a very narrow view of economics. A general economic good is also served by decent pensions forming part of good employee remuneration, and boosting people’s self-sufficiency and consumer spending power in retirement.
And there is the very serious matter of investment by pension funds in the UK’s capital markets, helping to drive growth through long-term investment – a role that the PIP initiative mentioned above is fundamentally dependent on. The European Commission’s green paper on long-term investment also recognises this vital function.
If companies are putting less into their pension schemes, they of course may also be investing more in their own productive capacity – but typically over shorter-term investment horizons, and for the benefit for their shareholders rather than the wider economic interests that tend to be served by pension fund investments.
Consider the case of bankrupt American camera manufacturers Kodak, whose UK pension scheme was recently rescued from the clutches of the Pension Protection Fund (PPF; the lifeboat where insolvent pension funds ends up, so members get some but not all of their pension entitlements).
With the new duty on employer growth, would the scheme instead have been accepted into the PPF, allowing the Kodak group to be free of its pension liabilities in the UK (it has got rid of them anyway under the TPR deal, but at the cost of two of its businesses) for the sake of the company’s ‘sustainable growth’? There are complex arguments on both sides of the debate, but it is certainly hard to see how this would have constituted a general economic good for the UK, given that Kodak is not a British company, and that its troubles have a great deal more to do with the rise of internet retailers and smartphones than its pension scheme.
None of this is to suggest that the new duty on TPR is a bad thing in principle. Trade unions have often criticised TPR’s primary focus on protecting the Pension Protection Fund rather than scheme members and their sponsoring employers. And it may even suggest a renewed and very welcome focus on securing the future of defined benefit pensions, as well as simply protecting accrued rights – although this would contradict the ‘endgame’ mentality that is now prevalent among the regulators of defined benefit pension schemes.
The problem will be how the new duty on employer growth is applied in practice. If its operation is unduly influenced by political pressure, and the Conservatives’ narrow view of economics, then there is a real chance it will do more harm than good – for pension savers, and ultimately, the economy as a whole.