Public and private sector pension plans could be pooled into “GB superfunds” with assets of up to £500bn in order to release tens of billions for UK business growth, according to “extremely radical” proposals.

If acted on the suggestions, set out in a report from the Tony Blair Institute (TBI), would create the UK’s first “superfund” designed to undo years of capital market decline, through the creation of large pension funds such as those in Canada and Australia.

The UK is the only major European country and major equity market whose current stock-market value is significantly lower than it was before the global financial crisis, falling from third place globally in early 2000 to 10th today, according to the report, entitled ‘Investing in the Future: Boosting Savings and Prosperity for the UK’.

The pension-fund crisis in September 2022 was a warning shot that exposed the system’s fragility and the risks to pensioners’ financial security, TBI says. Its paper, published at the end of last month, sets out what it describes as a “safe, practical and scalable solution” with the “logical expansion” of the Pension Protection Fund (PPF), an “existing, proven, successful institution, to become this country’s first superfund” dubbed GB Savings One.

Instead of having to go bankrupt to transfer their pension fund to the PPF, company sponsors of the smallest 4,500 UK defined-benefit (DB) schemes would be offered the voluntary option of transferring to the PPF on a benefit-preserving basis to be agreed between the companies and the PPF.

The PPF model would then be replicated and rolled out throughout the UK in a series of regional, “return-generating, not-for-profit entities” that would gradually absorb the UK’s 27,000 defined-contribution funds, the Local Government Pension Schemes, the remaining DB funds and, potentially, public-sector pension schemes, which in most cases are not funded.

Should the reforms be implemented by government they would, the report says, “secure better outcomes for UK pensioners, release capital for investment in long-term growth, reinforce national security by reducing the UK’s dependence on foreign capital, and begin the process of restoring the dynamism that the UK economy has steadily lost over the last two decades.”

In June, the Resolution Foundation also came out in support of a GB superfund in its research, Beyond Boosterism: Realigning the policy ecosystem to unleash private investment for sustainable growth. The report argues, “There is a need to consider pension reform as a route to raising investment levels by rebuilding concentrated firm ownership. This is because structural and regulatory forces in the pensions system have weakened the engagement of UK firms’ owners over the past two decades.”

The Foundation suggests that the government “provide a specific legislative regime around superfunds, which are a way to consolidate existing DB funds as an alternative means of allowing employers to end their liabilities.” 

It also suggests “more radically” that the government legislate to expand the remit of the PPF, in accordance with the TBI proposals, to allow it to act as a state consolidation option for solvent pension schemes. 

Between 2001 and 2022, UK private-sector-pension-fund holdings of UK equities fell from over 50% of the average pension-fund portfolio to just 4% today, according to the TBI research. 

Over the same period, their holdings of fixed-income securities (mainly gilts and corporate bonds) increased from 15% of total assets to approximately 60%. Total UK pension-fund liabilities jumped from £890bn in 2010 (when the 10-year gilt was 4%) to over £1.8trn in 2020 (when the 10-year gilt was 0.2%).

Naureen Zahid, Director of Investor Relations at early-stage venture capital firm OpenOcean, said: “A UK sovereign wealth fund would unite state institutions and pension funds to create a multi-billion dollar fund. Considering the historic and on-going risk of London losing companies to US listings, such a move by the government and private industry would greatly benefit the UK start-up scene.” 

The Pensions Regulator (TPR) estimates that every 0.1 percentage-point fall in interest rates on government bonds increases the accounting liabilities of UK pensions funds by at least £23bn. All of which was reflected in the companies’ balance sheets.

The root cause of these problems can be traced to accounting and regulatory changes to the UK’s tax and pension systems in the early 2000s, the TBI says.

In 1997 the government eliminated the dividend tax credit to encourage companies to reinvest profits rather than pay them out in dividends. This move had the unintended impact of making it less attractive for UK pension funds to hold shares in listed UK companies. 

And in the early 2000s, the UK Accounting Standards Board introduced a new requirement for UK companies to include pension-fund assets and liabilities on their balance sheets. “This introduced a hard asymmetry for companies, leading to extreme risk aversion on the part of pension trustees, especially once funds closed in response to the burden of these changes,” the TBI report says.

The main function of a nation’s capital markets is to channel the country’s savings into productive investments, which then strengthens long-term growth and productivity through improved capital allocation. Capital markets in the UK have ceased to perform that function, in part as UK fund managers now have so little remaining allocation of UK listed shares, according to the TBI.

This sentiment is reiterated in the Resolution Foundation research. “The common objective is a pension funds ecosystem that not only holds more UK equities, but does so via far larger funds able to provide more concentrated – and therefore engaged – ownership. These larger funds will also be able to invest more in unlisted high-growth firms and infrastructure projects.” 

If the government adopted the TBI proposals, the Resolution Foundation report claims that in a few years, “the UK would have a savings system consisting of half a dozen global-scale savings vehicles on the order of £400bn to £500bn, each of which would be among the 10 largest global funds. 

“In addition to better underpinning member benefits through higher returns over a long time horizon, these funds would have the capacity to deliver the productive investment the UK requires to transition to a new economy and the vital infrastructure for renewable energy, estimated at £50bn to £60bn per year between 2030 and 2050.”

For comparison, today, the Australian system supports around £1trn of assets, which the Foundation says is the size that the UK defined contribution (DC) industry is expected to reach in 2030.

Zahid says: “Forming the UK’s first superfund would enable forward-looking UK start-ups to secure capital from domestic stakeholders for global expansion. While instigating discussions is a promising first step, the government must now take decisive action. 

“The UK government needs to seize the initiative in driving investment reform. The government can achieve this by leveraging its convening power to bring institutional investors to the table, incentivising the private sector, and allowing the market to take over from there,” Zahid adds. 

Without such investment incentives, the UK will be doomed to continually lose the best and brightest start-ups and entrepreneurs to the US, Zahid warns. “It’s up to the government and private industry to work together to turn the UK sovereign wealth fund from a dream into reality.”

The UK has languished as a low investment nation with underinvested infrastructure, weak skills investment and low wages. With continued low productivity and falling living standards it seems it’s high time for a radical intervention based on a “proven, successful institution,” to create a route for investment to secure Britain’s future for the next generations.