Who’s Up For Managing a $1 Trillion Pension Fund?

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A proposal to mash together all of the U.K.’s corporate pension plans into a handful of mega-funds with more than 2 trillion pounds ($2.8 trillion) of assets promises to revitalize the London stock market, give retirees more security and boost the British economy all in one go. This ingenious idea has some logic, and a wrinkle.

Investment banking boutique Ondra Partners is suggesting that the U.K.’s defined-benefit corporate pension plans — numbering more than 5,000 — merge into three national vehicles. The sheer scale of these platforms would facilitate investment strategies that deliver better returns, it says, helping solve the problem that a majority of U.K. retirement programs have liabilities exceeding their assets.

In particular, these giant funds would have the firepower to write big checks for long-term infrastructure projects, a good match for pension obligations. They’d be better placed to invest in early-stage tech firms too.

The companies injecting their pension plans into the new vehicles would get something close to a clean break. They would have to make annual payments covering newly accrued retirement promises, and honor existing commitments to reduce deficits via top-ups over the next few years. But the liability for paying retirement incomes would be transferred over.

The mega-funds could invest the assets more adventurously. If they upped the weighting of domestic stocks, that could reverse pension plans’ wholesale withdrawal from their home equity market. Between 1998 and 2018, Britain’s pension funds and insurers went from owning just under half of U.K. stocks to less than 10%, according to data from the U.K. national statistics office. Changes to the accounting treatment of pension liabilities prompted a rotation into corporate and government debt.

U.K.-listed companies might then dance to a different tune and spend more on investing for growth and less on funneling cash to shareholders. This would address a real issue. The FTSE-100 index has delivered poor total returns relative to other global benchmarks while paying out very high dividends over the last two decades. London happens to be a major center for income funds, with a big retail market for high-dividend stocks. 

If all went to plan, improved investment performance would see assets neatly cover the U.K. corporate sector’s existing pension promises, the domestic stock market would get a new lease on life and companies would be free of the uncertainty of their pension costs. British utilities and transport companies — a favorite M&A target of overseas infrastructure funds — would find natural owners closer to home.

There’s value in diversifying risk. There’s also no free lunch. The proposal liberates shareholders from covering any increase in pension liabilities if medical advances create another jump in longevity, or from making up shortfalls if investment returns collapse. That risk implicitly passes to taxpayers, who are already backstopping huge public-sector defined-benefit pension liabilities, says pensions consultant John Ralfe. That would be a new departure. The Pension Protection Fund, which takes on pension programs when companies fail, may be a public body, but it’s funded by levies on the private sector.

This doesn’t undermine Ondra’s proposal. But it would justify having companies pay an extra top-up into pension plans just before transferring them into one of the vehicles. The government would also need to be sure that the broad benefits to the U.K. are worth the cost of implicitly backstopping the new funds. There’s a prize to be had here. Chancellor of the Exchequer Rishi Sunak should see if the idea can be made to work.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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