Cardano, the pension advisory and investment management specialist, has urged Government to start funding public sector pension funds or the State pension to support its economic growth ambitions.

In its response to the Department of Work & Pensions consultation, Options for Defined Benefit schemes: a call for evidence, Cardano argues that examples of successful investment in productive assets by Canadian, Nordic and Dutch pension funds offer the most obvious route to unlocking funds to underpin UK economic growth.

Funded UK public and state pension schemes would also reduce the long-term fiscal burden on the state and avoid the constraints that would necessarily apply to reforming corporate DB pensions in order to protect member benefits.

Cardano proposes the creation of a public or state pension fund with similar investment strategies as global peers including Canada Pension Plan, Sweden’s AP funds and the Netherlands’ ABP and PFZW. It highlights four key arguments in favour of reform:

• State and public pensions are open by definition and only mature with the population. As a result, they can be truly long-term in perspective and natural providers of capital for long-term investments;
• They form naturally consolidated large pools of capital – for example, PFZW provides pensions to three million Dutch public employees in the care and welfare sector and has over €200bn in assets. A UK equivalent would be significantly larger if fully funded;
• There is no need to significantly change the existing regulatory and legal framework – as well as successful examples overseas, the UK’s LGPS provides an established domestic model to build on;
• It would be much easier for Government to mandate a minimum exposure to UK productive assets for a state or public pension fund rather than corporate funds.

Over the long term, a partially funded public and state pension model could reduce the financial burden on the UK state if it was funded by issuing gilts and investing in higher returning asset classes, like productive assets.

The UK currently earns no returns from its unfunded pensions and faces a growing burden to fund state pension payments for its ageing population. However, with the Pension Protection Fund already achieving annual returns of c.2% above gilts, funded public or state pensions could realistically target c. 3-5% above gilts. Canada’s Ontario Teachers’ Pension Plan, for example, manages CAD$250bn, of which at least 40% is invested in productive assets, and has generated an annual return of 9.5% since its inception.

Cardano’s analysis suggests that a £500bn public or state pension fund in the UK could reduce the Government’s fiscal burden by £15-25bn per annum.

The alternative of reforming corporate DB schemes would require retrospective action to reverse decades of measures to protect the security of member benefits – a step which Cardano suggests is likely to be practically difficult.

Instead, its consultation response highlights scope for marginal improvements to corporate DB funding which could positively impact low risk/low return productive assets. These include:

• Measures to “de-stigmatise” investment in private debt by DB schemes, who fear that doing so may preclude them from the ability to transact a buyout in the future;
• Measures to encourage the bulk annuity market (which is expected to consolidate a significant proportion of the corporate DB sector over the next decade) to invest further in private debt; and
• Ways to use the PPF’s (unowned) surplus for the benefit of the UK economy.

Kerrin Rosenberg, CEO, Cardano Investment, commented: “For a long time the UK’s DB pension regime has worked incredibly effectively to prioritise delivering members’ benefits, often at the expense of the sponsoring employer and the wider economy.

“Policymakers’ appetite to stimulate the economy and encourage investment in UK productive assets is laudable. However, with the majority of DB schemes closed and on an inexorable path to de-risking, there are more obvious solutions available that don’t involve ripping up the regulatory rulebook.

“By harnessing the vast potential of unfunded state and public service pensions, we can act now to support economic growth over the next decade and beyond, while also safeguarding state pension benefits for future generations.

“A public and state pension superfund could become a significant contributor to UK economic growth, while also freeing up funds from national insurance contributions to support state spending commitments in other socially important areas.”

• DB schemes