A shocking revelation has experts sounding the alarm: leading pension funds are missing out on substantial gains, opting for a cautious approach that yields returns comparable to a simple savings account. With billions of pounds at stake, the question arises: are these funds truly maximizing their potential?
In November's budget, the focus on investing was evident, including the planned reduction in cash Isa allowances for under-65s. Yet, some defined benefit pension funds, which promise a set income in retirement, are delivering as little as 1.7% annually on their investments. These funds argue they are 'fully funded,' implying no need for higher returns or risk-taking.
Take, for instance, the Universities Superannuation Scheme, the UK's largest DB scheme. Over the last five years, it has returned an average of 1.7% annually, managing £73 billion in assets. Despite a surplus of £10 billion in its DB section, the scheme previously faced a deficit, prompting increased contributions from savers and employers.
And this is where it gets controversial: the analytics firm Moneyfacts reveals that easy-access savings accounts offer better rates, with an average interest of 3.23% over the last five years.
The Airways Pension Scheme, run by British Airways, has also underperformed, with average losses of 1.73% annually over the last five years.
Michael Tory, chairman of Ondra, a financial advice firm, attributes this to an obsession with risk elimination. "The system is entirely focused on risk elimination with no recognition that risk and return are linked in a capitalist system," he says.
Edmund Truell, a former venture capitalist, agrees, stating that post-2008, the pension regulator pushed funds to 'de-risk,' investing in government bonds and gilts. However, these have returned only around 1% annually, quickly eroded by inflation.
Tory believes this has led to a chronic shortage of long-term risk capital, citing Deep Minds, now owned by Google, as an example of British innovation lost to foreign ownership.
DB schemes, unlike DC schemes, guarantee a set income for life in retirement. While they are no longer common in the private sector due to their expense, their combined assets still amount to about £1.4 trillion. Tory argues that this failure to invest over £1 trillion in the UK economy is hindering economic growth.
The chancellor has been encouraging UK pension schemes to increase private equity investing, with 17 firms agreeing to invest at least 10% of DC pension funds into private assets by 2030. However, this focus is not applied to DB schemes.
"We were once a country that embraced adventure and risk, where British-owned companies innovated and raised capital for growth," Tory says.
Truell believes better returns from the universities' scheme would have meant no need to increase contributions, with the benefits going directly to members.
The Universities Superannuation Scheme states that its investment approach aims to meet members' promised pensions while considering regulatory requirements and the risk tolerance of sponsoring employers.
With the scheme now in surplus, it claims its growth-oriented strategy is doing its job, with around half of its assets invested in the UK, including £13 billion in private assets.
So, the question remains: are these pension funds truly serving their members' best interests, or are they playing it too safe? What do you think? We'd love to hear your thoughts in the comments.
