There is a reason the UK has a thriving funded pensions sector, which for most workers with above-average earnings will deliver a generous portion of their income in retirement.
It is because, when we reach the age chosen to withdraw from paid work, having actual assets that we can ‘trade’ with those still in work gives us the best chance of a healthy retirement income.
The alternative – unfunded pensions – rely on an intergenerational solidarity plea that is susceptible to claims that future tax burdens are falling too heavily on the next generation.
However, the extent of the advantage that asset ownership will give us in trading with the next generation is highly dependent upon what sort of assets we have selected.
Gilts leave us in a weak position, akin to offering to tear up an 'IOU' in front of our creditors.
Equities, through which we own pieces of businesses and/or property, may give us a better chance of holding something that future workers value – providing we are not holding the wrong sort of equities such as ‘stranded assets’ in businesses left behind by technological developments, geopolitical tensions or the effects of climate change.
This, for me, is the exciting part of the Mansion House Compact, which has so far committed nearly two-thirds of the UK’s entire defined contribution workplace pensions market – including Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer – to allocating at least 5 per cent of their default funds to unlisted equities by 2030.
“If the rest of the UK’s DC market follows suit, this could unlock up to £50bn of investment into high growth companies by that time,” chancellor Jeremy Hunt said.
However, the better investment returns that the chancellor is expecting are not the reason for doing this. Rather they will be a consequence of doing it.
Money re-directed from listed to unlisted securities can then be put to work to build the high growth businesses that will be the engine rooms of tomorrow’s prosperity.
Investing in these businesses means that the next generation of retirees will be able to sell on to the next generation of workers the modern businesses and infrastructure that they value.
Provided they have grown into businesses generating lots of output and good jobs, future workers will be able to pay a good price for them to the retiring generation.
It all makes good sense on paper. Except that neither defined benefit nor DC pensions really lend themselves to this intergenerational contract.
The DB market is now over-mature. Today, this market is focused on removing unexpected liabilities from company balance sheets through executing buyouts as quickly as possible.
Meanwhile, the DC market is too short-term focused, with a need for daily pricing of units and high levels of liquidity to cope with the surge of outflows that can follow a change of fashion or a new threat like climate change.
