More questions than answers on Labour’s plans for pension reform

Curiouser and curiouser! Since Labour came to power, every big announcement from the government seems to have been delivered the wrong way round. First, we saw a manifesto pledge — one that boxed the party into a corner on taxes it was then unable to raise, made apparently without yet knowing the full picture of the UK’s parlous finances.
Then came a star-studded International Investment Summit that was scheduled before the budget. This amounted to asking global investors to allocate capital to a market where there was a huge question mark over the business environment and tax regime.
Next was the launch of a National Wealth Fund that promised to increase UK investment but without specifying a pipeline, co-investment partners or how it would be managed. And most recently the budget itself, which mentioned “growth” 367 times but penalised entrepreneurship and made it less attractive to start up and grow businesses.
It’s all getting a bit “Rachel Through the Looking Glass”, with the chancellor peering into a distorted mirror and stepping into an alternate world where fiscal policy defies economic reality and budgetary moves appear backward. Instead of driving growth, Labour policies seem to slow it down; instead of encouraging investment, they deter it.
So it was a curious decision, but I suppose in keeping with precedent, for the Treasury to hint last week that Rachel Reeves will use her inaugural Mansion House speech to overhaul the UK pensions system to channel billions of pounds into UK assets … including into those companies hit hard by the budget just 11 days ago.
Investors will be watching with trepidation to see if the Mansion House address will be yet another instance of following policies down a rabbit hole with little idea of their impact.
Markets are taking fiscal discipline more seriously these days — just look at the US and France — and big political speeches are a chance for governments to establish economic credibility. While last week’s announcements didn’t have investors retching over their Bloomberg terminals as they did during the Liz Truss mini-budget, the jittery gilt market reaction suggests their stomachs weren’t entirely settled as they digested the reality of increased borrowing combined with a faltering growth rate.
Bond investors are not yet in full vigilante mode; they are more like malcontent teens, daubing rude anti-government graffiti on the bus stop. But it could escalate. If Mansion House fails to provide clarity on growth plans beyond “something to do with pensions”, the gilt market response could become more extreme.
So far, we know that the chancellor wants to unlock pension scheme capital and direct it towards infrastructure and the London stock market. For markets to buy into this, Reeves needs to be crystal clear on how these changes will work and why she believes they will successfully drive growth.
At the moment we have more questions than answers. Which pension schemes are involved? Aside from the local authorities, which are to be glued together to form a “super fund”? Will corporate defined-benefit and/or defined-contribution schemes be leading actors too? What incentive is the government giving pension funds to take on more risk by investing in assets they appear to be deliberately ignoring at the moment? And if they do, exactly how, and by whom, is the money of pension scheme members protected? Critically, what actually counts as a “UK asset” — stocks, bonds, infrastructure, public and private, big and small caps, or all of the above?
In Alice Through the Looking Glass, Humpty Dumpty claims: ″When I use a word … it means just what I choose it to mean — neither more nor less.” “The question is,” replies Alice, “whether you can make words mean so many different things.”
Labour has already faced this conundrum with its definition of “working people”, hastily retrofitting the most politically expedient meaning in an attempt to persuade voters it wasn’t breaking manifesto promises. You cannot pull the same trick with the definition of UK assets, especially when people’s retirement savings are in play.
Without clarity on these terms upfront, the Mansion House speech will not set out a growth plan but, at best, a growth dream — and bond markets won’t like it.
So far, I can’t see anything Labour has done that meaningfully makes the UK a more attractive destination for capital. If anything, it seems the government is trying to get momentum for its policy ideas first, and worrying about the evidence and proof points second.
As Alice herself puts it: “If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t.” The chancellor may be taking a similar stance in this economic Wonderland, but I’m not sure investors are on the same page.
Seema Shah is chief global strategist at Principal Asset Management