Pension changes – good or bad?

Will pension changes affect pension fund backing of infrastructure? ACE policy senior economist Graham Pontin and policy officer Peter Campbell assesses the implications.

This government has been very keen to encourage pension funds to begin considering investing in construction and infrastructure projects, as a way to finance their delivery without massive increases in public sending. That is why George Osborne’s decision to liberalise rules around pensions and enable savers greater access to their savings in last week’s Budget could have the potential to increase uncertainty once again in the sector.

The Treasury’s own figures published in the Red Book alongside the Budget indicated that in the years up to 2030, it anticipates this policy will bring in an extra £17bn in tax receipts. This means Treasury expects billions more to be withdrawn and spent, thus depriving pension funds of those investment resources and potentially, of the ability to invest in capital projects.

With an infrastructure pipeline outlined in the National Infrastructure Plan worth almost £400bn, these funds could, potentially, provide a valuable source of capital. One just needs to look at the funds such as the Ontario Teachers’ Pension Plan (OTPP) for an example of a fund willing to invest resources in infrastructure. This could now be at risk if pension funds see their capital base shrink as savers eschew traditional annuities and the ability of infrastructure projects to raise capital could be damaged.

There are several reasons to think this might not actually be the case, however, and funds will still be available when the rule changes are introduced. First of these is the notion that the market will naturally adapt and provide, existing annuities providers will develop better, more attractive products for investors, and this will encourage savers to continue purchasing financial products that make capital available for funds to invest in infrastructure.

Secondly, space in the market could be created for alternative providers to come forward; for example the OTPP could develop an annuity based on its High Speed 1 concession. This would have the benefit of providing them with more capital that they could then invest in alternative projects, while also providing investors with potential returns as high as 10 per cent, which has been the fund’s average since inception.

Thirdly, it is to be hoped that although many might take up the opportunity to access their savings and spend them, the vast majority will continue to seek a financial product that will provide them with a decent return, income, and security after retirement. Pension funds will therefore not likely to see too much of a decline in their capital bases, and still be a considerable source of investment, should infrastructure projects require it.

These solutions, however, are still someway off realisation, as it will take time for the market to develop alternative products, while we will just have to wait and see if people are as rational in their behaviour as we hope. In the meantime, the good work of the past three years in creating a stable and certain investment environment to encourage further pension fund investment, risks being undermined, and an extremely valuable source of capital could be cut off before it has even really been tapped. This will ultimately be to the detriment of UK Plc as it will not be able to develop the infrastructure it needs to compete globally.