Chancellor Jeremy Hunt has pledged to boost future retirees’ incomes by £1,000 a year with a raft of new post-Brexit pension reforms, but the moves come with risk, an expert has warned.
Mr Hunt described the reforms as a win-win for both pensioners and British business success during his Mansion House speech on Monday night, with measures that include an agreement between nine of the country’s biggest pension funds to invest five percent of their assets in start-ups and private equity.
The move is thought to unlock up to £50billion in investment in high-growth companies by the end of the decade if all parties commit, as well as boost retirement income by over £1,000 a year for a typical earner.
However, a pension expert warns the move could see Britons “end up with less” if investments were to fail.
Becky O’Connor, director of public affairs at PensionBee, said: “As far as generating higher returns for pension savers, the Chancellor’s reforms are a shot in the dark.
“The Government suggests that the approach will lead to an ‘everyone’s a winner’ scenario, in which retirees get bigger pension pots and innovative UK companies get the capital they need to grow. But there are no guarantees this win-win result will play out.
“While riskier, early-stage investments could generate growth and higher pension pots over the long term, there is also a chance that some of these investments may perform badly.”
Ms O’Connor said earlier-stage businesses are generally “riskier” and many of them “could fail”, which is why such opportunities are usually confined to private equity, venture capital and alternative investors who can stomach large losses.
Ms O’Connor continued: “If investment losses occur, pension savers would not get the higher retirement income the Government is suggesting they will have as a result of these reforms. They could even end up with less, although the target five percent of assets suggested should mean that no one’s pension is decimated, should the worst happen and the investments fail.”
Meanwhile, an investment analyst at Wealth Club highlighted the merit of the investment, but warns the measure should be “handled with care”.
Wealth Club’s Nicholas Hyett commented: “There are attractive returns to be made in smaller companies, and holding them as part of a diversified portfolio makes complete sense for a pension fund – just as it does for an individual.
“This is particularly the case for the Defined Contribution (DC) schemes that are now the norm for millions of investors – with the Government estimating increased investment in private equity could add £1,000 a year to an average retirement income.
“Large Venture Capital Trusts (VCTs) have delivered an average return of 90 percent over the 10 years to the end of March – better than the main stock market over the same period.”
Mr Hyett said the increased interest from pension funds would also be beneficial to existing investors in smaller companies and could provide the next stage of funding to already successful start-ups.
He added: “If pension funds can be encouraged to invest in UK start-ups, where they see genuinely attractive opportunities, that would be good news for everyone – pensioners, investors and entrepreneurs alike.”
Included in the Chancellors raft of reforms are plans to introduce a permanent ‘superfund’ regime to provide employers with Defined Benefit (DB) schemes and their trustees with ‘a new way of managing Defined Benefit liabilities’, as well as a new ‘Value for Money’ framework.
The framework aims to make clear that investment decisions by pension firms should be based on overall long-term returns, not just costs. To find out more about the proposed reforms, click here.
