Labour looks to Canada for pension inspiration
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Chancellor Rachel Reeves has said the UK’s pension funds should learn lessons from Canada as she hosted a roundtable with the eight largest pension funds of the country in Toronto on Wednesday.
Pensions funds should “learn lessons from the Canadian model and fire up the UK economy”, the chancellor said on Wednesday, pointing out the billions invested by Canadian pension funds in the UK. This includes an investment in troubled British utility Thames Water by the Ontario Municipal Employees Retirement System, its largest shareholder.
Reeves is urging UK schemes to ‘back Britain’ and learn how scale can open up investment opportunities.
Reeves said: “The size of Canadian pension schemes means they can invest far more in productive assets like vital infrastructure than ours do. I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment.”
She added: “We’re already beginning to see schemes announce plans to invest.”
The Treasury pointed to the launch of the Future Growth Capital co-investment fund by Phoenix and Schroders last week, which has plans to invest up to £20bn in the UK over the next decade.
Pension funds observed in the past that while there was demand, attractive opportunities were hard to find in the UK. The new government has been seeking to address this by reforming the planning system and removing the ban on onshore wind farms among others.
It is also creating a £7.3bn National Wealth Fund, with input from investment experts, including David Vickers, chief investment officer at the Brunel Pension Partnership, and Carol Young, chief executive of the Universities Superannuation Scheme.
Notably, Canada’s pension funds are large because the country funds its state pension and public sector pension arrangements, in contrast with the UK. There have been calls to fund public sector schemes in the UK recently. mallowstreet understands the government is not planning to change the funding arrangement of the unfunded public service pension schemes, which might risk spooking the gilt market.
It is unclear how the UK will emulate Canada without funding public sector pensions. The Local Government Pension Scheme is the only funded public sector arrangement in the UK, aside from those for arm’s length bodies. The LGPS in England and Wales has set up eight asset pools since 2018, as mandated by former chancellor George Osborne. The last government wanted to get the LGPS to consolidate further, into £200bn pools by 2040, and to bring all listed assets into the pools by 2025.
The Labour government has announced a pensions review that will focus on investments first and foremost and could reveal where the party plans to take the pension system.
Steve Simkins, partner and public services leader at consultancy Isio, said his firm is supportive of increased scale for the LGPS but warned of practical hurdles.
“There are governance and operational improvements on offer if the right structure can be achieved, but with the ambition looking like it's a big step beyond current pooling arrangements it remains to be seen how this can be achieved in practice. There will be challenges along the way in terms of integrating the local needs and views of underlying funds and their employers, especially with the excellent overall funding position. Integrating investment portfolios, administration and governance at this scale will be a huge endeavour,” he said. “More scale can be achieved, but it needs to work from the bottom up as well as top down.”
Who are the ‘Maple 8’, Canada’s largest pension funds?
How could the Treasury get UK pension funds to ‘learn lessons’ from Canada?
