Rachel Reeves’s plan to merge dozens of council pension funds risks triggering stagnation, a senior investor has warned.
Tony Dalwood, the chief executive of asset manager Gresham House, said uncertainty over how the Government would implement the plan meant many pension funds were pausing important investment decisions.
The Chancellor is forcing Britain’s 86 town hall pension schemes to combine their £392bn of investments into eight investment “pools” to tackle the fragmented system. The plan is meant to spur growth by encouraging more risk-taking by bigger funds.
However, Mr Dalwood warned that uncertainty about how the policy would work in practice meant investment was slowing. Inertia risked hitting investment in important UK industries such as green energy and infrastructure for up to two years, he said.
Mr Dalwood said: “There will be a period where the implementation will lead to stagnation. People won’t take decisions and, when they do, there’s a question over whether they will have the resources to execute them.
“We’ve seen it already. People are saying that things are changing and they can’t make decisions until they know what the direction of travel is.
“There’s going to be quite a few pension schemes in the UK who will say things are happening so I’m not going to make any decisions.”
He added that merging into larger pools would lead funds to invest more money abroad, which “runs counter to the Government’s UK-focused growth ambitions”.
Mr Dalwood is a veteran private equity investor and founder of Gresham, which invests on behalf of 19 town council pension schemes in assets such as UK housing and green energy.
Specialist firms including Gresham could possibly lose out from the merger plans because fewer funds means fewer fund managers will be hired.
While Mr Dalwood’s comments therefore may involve a degree of self-interest, even the mere suggestion of a slowdown is likely to rattle officials and Ms Reeves, who is battling to maintain her economic credibility.
The Chancellor said on Tuesday that Britain needed to go “further and faster” in search of economic growth, after a surge in bond yields put her at risk of breaching her fiscal rules laid down at the Budget.
Pressure is growing on the Chancellor to come up with new ideas to boost the UK economy.
The move to merge the local government pension schemes was launched alongside the Budget and was presented as a key plank of the Government’s economic growth mission.
The policy aims to replicate the success of the so-called Maple-8 Canadian public pensions funds, which have generated better returns than UK equivalents. Ms Reeves has hailed Canada as a model for the UK.
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Although much of the industry backs the plans, there are fears over the practical implications and concerns about whether town councils will lose their authority to make decisions.
The 86 local councils responsible for managing their individual pension funds currently have the power to appoint their own investment managers.
The Society of Pension Professionals (SPP), which represents pension consultants, has warned that the Government is moving too fast with its plans.
Under the timetable, council pension schemes are expected to tell the Government how they plan to pool their billions of assets by March 1.
Kirsty McLean, of the SPP, said: “Within the LGPS [Local Government Pension Scheme] it is not clear how these proposals will meet either of the Government’s objectives of improving pension outcomes for members or increasing investment in the UK.
“As a result, we are urging them to carefully reconsider both the nature and pace of some of these proposals.”
Hymans Robertson, one of the largest consultancies advising pension schemes, also warned that the pace of change from the Government risked losing money for the taxpayer.
Robbie McInroy, from the consultancy, said the timescale was “hazardously ambitious”.
He said: “The proposed speed of change risks inefficient progress and poor outcomes – including irrecoverable build costs and investment losses resulting in increased cost to the taxpayer.”
Mr Dalwood compared the uncertainty among pension scheme investors to the unease among corporate bosses in the run-up to the Budget, which prompted companies to pause activity and triggered a slump in growth.
The Ministry of Housing, Communities and Local Government, led by Angela Rayner, is consulting on the proposed pensions overhaul.
A government spokesperson said it was not the case that uncertainty over its plans to merge council pension funds risks stagnation for investment in the UK.
They said: “Our ‘Fit for the Future’ consultation will provide long-term clarity by putting the LGPS on a clear and firm trajectory to scale consolidation, alongside measures to improve governance of the scheme and boost local investment.
“We will respond to the consultation in due course and, along with the introduction of the Pensions Bill this summer, we will provide further certainty to the sector.”