Pension Fund Reliefs

Question

14:49:00

Asked by

To ask His Majesty’s Government what plans they have to ensure the taxpayer spending on pension fund reliefs has a beneficial long-term impact on the United Kingdom’s economy and financial markets.

My Lords, the Government published the interim report of the pensions investment review on 14 November. This report put forward a series of ambitious proposals to reform the UK pensions system. Together, these proposals could unlock around £80 billion of productive investment in infrastructure and fast-growing companies. The full report will be published in the spring ahead of legislation being introduced in the pension schemes Bill.

I thank the noble Lord for his Answer. Can I press him a little on the £70 billion of taxpayers’ money that is going into people’s pensions every year, with absolutely no requirement for any of it to be placed into the UK or to revive the UK economy? We have a growth agenda, and a desperate need for long-term investment in assets that are very suitable for UK pension funds. Will the noble Lord agree to meet me to discuss ways in which we can encourage or incentivise more pension assets, and more of the taxpayer contribution, to boost our economy rather than all the others? All other major countries’ pension schemes have significant overweighting in their domestic markets, whereas ours have maybe 3% in UK equities.

I am very grateful to the noble Baroness for her question. I take this opportunity to recognise her career-long commitment to improving outcomes for savers and investors. The announcements the Chancellor made at the Mansion House on the pensions review could unlock billions of pounds of additional investment, but of course, as the noble Baroness rightly said, it is not in any way guaranteed that this investment will take place in the domestic market. The Government share her concerns that UK pension funds are investing less in the domestic economy than overseas counterparts. There is also clear evidence of a sustained pattern of withdrawal by DC pension schemes from UK-listed equities for at least the last decade. That is why the pensions review is considering whether further interventions may be needed to ensure our reforms benefit UK growth. We will continue to work with the pensions industry to increase investment in UK markets. I look forward to continuing to work with the noble Baroness on these issues and of course I am very happy to meet her.

My Lords, the Government’s recent announcement on measures to spur growth will increase the supply of infrastructure and productive investment for pension funds to invest in, but the fragmented nature of UK pension provision can hamper its ability to invest in such assets—in many instances, it cannot deal with the scale of investment required. Do the Government remain committed to addressing this capability problem as part of their strategy for growth?

I am grateful to my noble friend for her question. I absolutely agree; there is international and industry consensus that scale and consolidation are beneficial to pension funds, driving economies of scale and efficiencies that can be passed back to savers and unlocking productive investment. That is what the Mansion House reforms seek to do. My noble friend talked about the ability of pension funds to invest in productive assets. That is what the infrastructure strategy and the industrial strategy are designed to do. I hope we will see more announcements along those lines at the time of the spending review.

My Lords, I hear what the Minister says, but what steps are the Government taking to increase the supply of domestic infrastructure projects and other long-term investments in the UK economy that would meet the needs of pension funds’ trustees and investors? I hear from trustees that they would quite like to do some of this stuff but sometimes struggle to find suitable projects in which to invest. Are we not going backwards, with listed investment companies being killed off?

The answer to the last part of the noble Lord’s question is no. However, I very much agree with the analysis he set out in the rest of his question. Ensuring that there are investment opportunities for these assets to be invested in is a key part of our strategy, which is why we are producing the infrastructure strategy at the time of the spending review. I hope it will answer a lot of the noble Lord’s questions when it comes out.

Following the excellent question from the noble Baroness, Lady Altmann, on pensions, I am not asking my noble friend the Minister to meet me, but I am asking him to have a look at the British ISA idea, whereby tax-free savings could be focused on British companies. I know that the Labour Party is keen on investment in British companies, as we all are. Will he look again and promote the idea of a British ISA?

I am flattered to be referred to as the noble Lord’s noble friend, and I consider him to be a friend as well. I am more than happy to look at his ideas.

I thank the noble Lord—my noble friend—the Minister for his replies. Will he agree that the best thing that pension funds, both defined benefit and defined contribution, could do to support the British economy is pay adequate and secure pensions? What plans do the Government have to ensure that that is the case?

I am grateful to my noble friend for his question. I of course agree that adequacy is an absolutely essential part of the pensions landscape. That is what phase 2 of the pensions review is designed to look at. The scope and terms of reference for phase 2 will be published in due course, once we have made fuller progress with phase 1.

Is the Minister aware that the resumption of investment flows into investment trusts requires investor confidence, including from pension funds, that the future regime will not repeat the mistakes of the past? How can that happen when the FCA consultation suggests reinstating aggregation of costs for investment trusts, which do not have consumer costs, and then not aggregating costs for ETFs, which do have such costs? Are the Government prepared to lose billions more over the next 18 months or more until the regulator gets it technically correct?

I am aware of the issue that the noble Baroness raises, mainly because of her campaigning on it. I pay tribute to her and to the noble Baroness, Lady Altmann, for their campaigning on this issue and for their Private Members’ Bills when we were in opposition, which I found extremely persuasive. I think we have made some progress since we have been in government. I regret that we are not able to go as far as the noble Baroness set out in her recent Private Member’s Bill right now, but we continue to review these issues and I thank her again for her campaigning.

My Lords, it is all very well to talk and review, but we face problems now. Do the Government intend to introduce extra incentives to encourage pension funds to invest in UK-listed shares and in domestic infrastructure?

The noble Baroness talks of a sense of urgency, but, of course, she had 14 years to do something about this and did not. The previous Government never legislated for the reforms they brought forward. We are legislating for them. As I said, we are absolutely concerned that UK pension funds are investing less in the domestic economy, which is exactly why the pensions review is looking at the issue.

My Lords, one of the obligations on the trustees of pension funds is to get the best return for pensioners. Is the Minister resigned to the fact that, if we invest in British infrastructure, pensioners will be worse off as a result?

I am not sure that the noble Lord should talk down the British economy in quite that way.

My Lords, for 2023, the cost of tax relief on pension contributions was £46.8 billion, and another £23.8 billion of relief was given on related national insurance contributions. Some 63% of the total tax relief went to 6 million higher and additional rate taxpayers, and only 37% went to 28.1 million basic rate taxpayers. By fixing the tax relief at 20% for everybody, the Government can not only reduce inequalities but have £14.5 billion a year surplus. Will the Minister consider this reform?

I am grateful to my noble friend for his question. He is correct that the Government spend around £70 billion annually on pension tax reliefs, because we want to encourage pension savings. That is why, for the vast majority of savers, pension contributions made from income during working life are tax free, and it is why, like many other countries, the UK exempts from tax the returns pension funds receive on the investments they make. Tax is not within the scope of the pensions review.

My Lords, one way of making pension funds better able to support British industry would be to amalgamate many of the smaller ones and increase their efficiency. I think this idea has already been mooted and discussed. Is there not a further thought that the large area of public service pensions, which are unfunded—not local government, which is funded—should be considered being made into funded pensions? Would that not also help to reinforce pensions’ contribution to our nation?

I am grateful to the noble Lord for his question. He is absolutely right that consolidation and scale are key to the strategy behind the pensions review. I will certainly pass his ideas back to my honourable friend, the Pensions Minister.