Over the years, many things have come out of Canada that have proved a hit over here in the UK — from maple syrup to Celine Dion.
If our new chancellor, Rachel Reeves, has her way, it could be pensions next.
Last month, on a visit to Toronto, Reeves unveiled plans to implement a ‘Canadian style’ pension model to unlock further investment potential.
She said she wanted British schemes to “learn lessons” from this model to “fire up the UK economy”.
Although Reeves’ proposals are in their infancy, there are many questions the chancellor will need to answer
Reeves met with representatives from Canada’s ‘Maple Eight’ — a group of large-scale pension funds that manages US$2trn of assets — to get some tips.
“The size of Canadian pension schemes means they can invest far more in productive assets — like vital infrastructure — than ours do,” she claimed.
The UK model is more fragmented. In England and Wales there are 86 local government pension schemes that are individually managed by local authorities. These funds have a combined 6.5 million members and manage assets worth an estimated £360bn.
To help them become more like their Canadian counterparts, Reeves is reportedly keen on consolidating these funds by asking them to either pool their assets or merge.
Private markets
There is another big difference between us and our friends across the pond: while UK pension schemes invest mostly in assets such as equities and bonds, Canada’s focus on private markets.
However, this is not without risk. For example, Canada’s Ontario Municipal Employees Retirement System pension fund is the largest investor in Thames Water, which, despite being the UK’s largest water company, has debts of about £15.4bn, leading to speculation it could be taken over by the government.
Charlton believes that encouraging investment into any single asset class would be unwise
Although Reeves’ proposals are in their infancy, there are many questions to which the chancellor will need to provide answers. For example, does investment in public infrastructure genuinely offer better value than that of traditional portfolios?
Second, many big Canadian pension funds are major investors overseas (the Thames Water case being a prime example). If Reeves’ plan is to replicate the Canadian model here, will she too welcome global investment, or will she ‘force’ pension funds to focus solely on UK infrastructure investments?
Benchmarks
Steve Charlton, SEI’s managing director of defined contribution, EMEA and Asia, is concerned Reeves may set benchmarks that “make master trusts invest a certain amount in UK equities by a certain date”.
Forcing them to go down that route, he says, would cause problems; one being that this would drive up the value of — and encourage investment in — “sub-par equities”.
While UK pension schemes invest mostly in assets such as equities and bonds, Canada’s focus on private markets
Charlton also believes that encouraging investment into any single asset class would be unwise.
“If you want to go into private markets, go into it in a way that is diversified,” he says. “Don’t rely just on equities. Private debt is another good option.”
Charlton says pushing investment into infrastructure and private markets also won’t miraculously provide a solution to the wider problem — that people are currently saving too little. In his mind, both the previous and current governments have “missed a trick” by not focusing on increasing auto-enrolment contributions first.
“They [Labour] have said they will look at auto-enrolment during the second stage of the pensions review, but that won’t be for another year or two, maybe more. I believe they have got their priorities wrong. That’s the issue that needs to be looked at now, before anything else.”
Will Reeves welcome global investment, or will she ‘force’ pension funds to focus solely on UK infrastructure investments?
Former chancellor Jeremy Hunt and many others have used the Australian pensions model as a ‘poster boy’ for how pensions should be done, says Charlton.
“But what people forget is that Australians put more into their pensions,” he observes. “If you don’t have enough money going in, you will never have enough coming out, no matter how cleverly you invest.”
Whether the pensions system is the latest Canadian import to stick remains to be seen, but the industry will watch with eagle eyes.
Daniel Cooper is news editor. Contact him at: daniel.cooper@moneymarketing.co.uk
This article featured in the September 2024 edition of Money Marketing.
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