Pension funds have been urged by the City minister to embrace a “culture of risk-taking” as the Treasury draws up plans to bolster returns for savers using an industry lifeboat.
Andrew Griffith said pension schemes must be willing to take a greater degree of risk in their investments, amid fears that a reluctance to put money in the stock market is holding the economy back.
Speaking to the Telegraph, he said: “We are working on removing points of friction, streamlining our regulations and encouraging a greater culture of risk-taking.”
Jeremy Hunt, the Chancellor, is understood to be considering plans to hand control of underperforming schemes to the Pension Protection Fund (PPF), which currently protects people in retirement schemes when their employer goes bust.
Officials are considering how they can encourage small, poorly-performing defined benefit (DB) funds – old-style pension plans sponsored by an employer, which pay out a guaranteed proportion of a worker's income when they retire – to fold into the PPF, creating a superfund that can invest in a broader range of UK high growth assets.
Treasury sources said the idea was one of several options under consideration, but it is understood that altering the PPF's powers would require complex changes in the law and could not be rolled out before the next election.
The government-backed body already manages almost £40bn and was forced to step in and run the schemes of Carillion and BHS when the companies collapsed.
It is understood that Mr Hunt and his advisers are against forcing pension funds to invest in UK assets – in contrast to the shadow chancellor, Rachel Reeves, who has suggested they could be ordered to pay into a £50bn “growth fund”.
A Whitehall source said: “Under no circumstances should we be mandating.” A Treasury spokesman declined to comment.
The Tony Blair Institute will recommend in a report next week that sponsors of the smallest 4,500 DB schemes should be allowed the option of transferring to the PPF.
It will point out that although the UK has the third largest pension market in the world, no individual fund is in the global top 40.
The institute believes consolidation could transform the PPF into a superfund of around £400bn, making it one of the biggest in the world.
Mr Griffith said that pension fund managers are not currently being incentivised to deliver higher returns. He said: “[We have to] move the emphasis away from funds running themselves for the minimum cost to funds looking properly at performance and that is what matters here because it is about making sure long-term savers get the most prosperous retirement that they can.”
His comments came after City heavyweights warned earlier this week that London was falling behind rival financial centres owing to its risk-averse pensions industry.
Sir Nigel Wilson, chief executive of Legal & General, said Britain’s pension schemes were failing to support growth industries such as bioscience and risked holding back the economy.
In a sign of a change of direction, the boss of The Pensions Regulator also pledged to go after the trustees of struggling funds that are letting down their members.
Mr Hunt will on Friday announce plans to earmark £250m of taxpayer cash for the Treasury's Long-Term Investment for Technology and Science (Lifts) initiative, intended to spur the creation of new investment vehicles for pension schemes to back British science and technology.
Mr Griffith said: “The £250m will be used to seed a new vehicle aimed at defined contribution pension schemes, allowing them to invest in scaling up some of the UK’s most innovative companies.”
The Treasury will launch a call for proposals alongside the announcement.
Baroness Altmann, a former pension minister, welcomed the move, adding: “This Lifts fund is just a small story, but there are billions of pounds of pension money that could and should be directed to benefit Britain.
“By offering new investment ideas and long term growth projects for new companies, or desperately needed social housing and infrastructure, pension funds could enhance returns.”
Earlier this week, The Telegraph reported that thousands of poorly-performing pension funds were causing savers to miss out on nearly £70,000 in lost investment returns.
There is growing concern that pension funds are increasingly pulling back from stocks and investing instead in safer but less lucrative assets such as bonds, in a growing problem known as de-equitisation.
Mr Griffith said: “De-equitisation is a long-standing feature of the market and it’s been a concern for some time, it’s not new. People have alighted on it more recently but in policy circles and in the Treasury, this has been a concern.
“It’s fully one of the things we are focused on when we think about the reforms to the financial services sector generally and pools of trapped capital whether they be in peoples’ private savings, in institutional capital such as the work we’ve done on Solvency 2 and to pension funds themselves.
“It’s a combination of changing the culture of risk, removing some of the frictions at pace... and bringing forward new vehicles for investment in equities or high growth sectors such as Lifts.”