The Chancellor is crossing a dangerous line. And she’s doing it with our pension pots.
Chancellor Rachel Reeves is dragging our pensions into uncharted territory (Image: Getty)
Rachel Reeves is rewriting the rules of the pension system. No Chancellor has ever dared go this far.
She wants to tell the people managing our defined contribution workplace pensions where to invest our retirement pots. That’s an extraordinary power grab.
Under her plan, smaller workplace pension schemes will be forced to merge into so-called “megafunds”, each with at least £25billion in assets.
Reeves claims her plan could boost the average worker’s pension by £6,000. Sounds great. And yes, there are upsides to building large, efficient pension schemes.
Economies of scale could cut costs. Members might get access to better-performing investments. But there’s a catch, and it’s a big one.
First, that £6,000 figure is highly questionable. No credible investment professional would promise a future return like that.
While there are savings, there will also be added costs. And in the real world, returns depend on markets, not ministers.
Reeves isn’t stopping there.
In most workplace schemes, much of the money sits in “default funds”. That’s the standard option when savers don’t choose where to invest.
Reeves wants her new pension megafunds to funnel this money into the UK economy. And if pension managers don’t comply, she’ll take legal powers to force it through.
For now, she says those powers won’t be used. But the fact they’re even on the table marks a shift into dangerous, uncharted territory.
UK markets have lagged badly in recent years. Pension managers have voted with their feet and gone global, particularly to the booming US.
Forcing money back into underperforming UK assets could give us a bit more growth, so I can see why Reeves is tempted. But it might also drag down returns and make pensioners poorer.
There’s another problem. It also risks tying your savings to Labour’s political goals.
The job of a pension fund is simple: grow members’ money. Not prop up the British economy. Or keep politicians in power.
That principle is now under threat.
Now comes the really scary bit.
Reeves isn’t just setting the framework, she’s picking favourites.
She’s named the sectors she wants your money to go into: infrastructure, clean energy and the fast-growing businesses of the future.
She even claimed her reforms will bring “better returns for workers”. Only someone who doesn’t know much about investing would dare claim that.
Clean energy is volatile and has slumped in recent years. UK infrastructure projects always take twice as long and cost twice as much as planned.
High-growth firms are, by definition, high-risk. Private equity is expensive, illiquid and boom-and-bust.
These investments don’t come cheap either. Pension managers will have to charge higher fees to manage them, which will come straight out of your pot.
Remember, this is a woman who had her credit card taken away from her. Now she wants to decide where your pension is invested.
Reeves is desperate to get the economy growing, but she’s barging in where she doesn’t belong. There’s a reason why no Chancellor has gone this far before. Because no Chancellor should.
