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The City of London Lord Mayor has criticised British companies for picking pension providers that charge the lowest fees, arguing more expensive managers who invest in alternative assets will deliver better returns.
“We’ve ended up with pension pots that have lots of equity trackers and lots of fixed income because it’s a cheap way of doing it,” Alastair King said in an interview with the Financial Times, adding that there had been an industry “fixation” on costs over the past 10 years.
King, who founded asset manager Naisbitt King in 2006, added that by charging higher fees, pension providers could invest more in specialist areas such as infrastructure, private debt and early-stage companies.
This would enable them to get “supernormal returns which is what this whole thing is about”.
However, research from the government’s actuarial department in November showed only a 2 per cent outperformance of its private markets model portfolio over a 30-year period.
The 696th Lord Mayor made the comments as he prepared to announce a new “employers pension pledge” on Tuesday in his annual Mansion House speech.
Under the pledge, 15 companies have agreed to make a public declaration to focus on net returns rather than costs when picking their defined contribution (DC) pension provider and to request more transparency on private market allocations.
Among the signatories are Tesco, NatWest Group, Standard Chartered, Aviva, Legal and General, Schroders, Samworth Brothers, London Stock Exchange Group, Octopus Group, Phoenix Group and Aberdeen.
Many of the groups already run their own pension schemes.
The move is the latest part of the government’s attempt to push British pension schemes to invest more in assets to boost UK’s sluggish economy, arguing it would improve investment returns in the process.
Under a voluntary commitment called the Mansion House accord signed in May, 17 of the UK’s largest DC workplace pension providers have pledged to invest at least 5 per cent of their assets in UK private markets by 2030, provided the assets were sufficiently attractive.
King said he wanted UK DC pension providers to invest more like those in Australia which allocate 14 per cent of their assets to private equity and infrastructure, according to think-tank New Financial, compared with 4 per cent for British DC schemes.
The lord mayor is the figurehead of the City of London Corporation, the local government of the Square Mile, and lives in the Mansion House.
His speech comes as chancellor Rachel Reeves has rowed back on plans to cut the cash Isa allowance after a fierce backlash from building societies and consumer champions.
King said he had encouraged the Treasury to streamline the Isa system, so you have one Isa account, dropping Lifetime Isas, Innovative finance Isas and the Junior Isa.
The chancellor is expected to focus on increasing financial advice when she addresses City grandees in her Mansion House speech on Tuesday, with a new pensions commission soon to be launched to find the best way to increase the amount workers put aside for their retirement.
King added to the growing number of voices raising concerns that the UK government’s recent non-dom taxes and changes to inheritance tax rules were denting the UK’s attractiveness for high earners and foreign investors.
The City mayor downplayed hopes that the chancellor could make a tax announcement at the Mansion House speech but said he had made the case to the government and there was a “tacit understanding that the current situation needs to be amended”.