TRANSPORT tycoon Sir Brian Souter has called for a national debate about how savings for retirement are invested claiming pension funds could provide a massive boost to economic growth if they changed their approach.

The Stagecoach founder reckons the overly conservative investment policies followed by many schemes mean businesses could be being starved of as much as £700 billion growth funding with potentially disastrous consequences.

“You might expect our pension schemes to be investing heavily in businesses and growth for the future, but they’re not,” said Mr Souter, who is President of the Institute of Chartered Accountants of Scotland.

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He added: “This really matters to every one of us. Pension scheme investments should be seen as a huge national asset, capable of being invested in ways that can provide benefit across the generations.”

In an article published in the institute’s CA magazine today, Mr Souter argues that current pensions policy and the investment approach of many pension schemes means the UK is squandering a fantastic resource.

He notes around £1,500 billion investments are held by defined benefit schemes, which pay pensions based on the salaries people earn when they retire.

With a further £271bn held in local authority schemes, the total funding equates to around 90 per cent of the UK’s total economic output.

The UK is unusual in having such a high level of funding set aside for pensions, which could be used to help businesses grow by investing in shares and bonds.

Mr Souter notes he started Stagecoach with savings lent by his bus-driver father.

However, the share of pension fund investment going into equities and bonds has fallen dramatically in recent years.

Mr Souter observes that pension schemes have been shifting funds into less risky government gilts and bonds in order to keep the Pensions Regulator happy.

The change in policy has coincided with defined benefit schemes finding themselves facing huge shortfalls when the value of investments is compared with their commitments.

The returns on gilts have fallen sharply because so many pension schemes have bought them during a period when the Bank of England’s quantitative easing programme has also fuelled demand.

The plans used by the 6,800 private pension schemes in trying to keep the regulator happy show an aggregate deficit of £400bn to £500bn, based on the assumption investments generate long term returns of only 2.4 per cent annually.

However, Sir Brian says schemes believe they could achieve returns of at least 4.3 per cent, with greater investment freedom, putting them in line to generate

£270bn surpluses.

“So, under one method there is a black hole of £400bn to £500bn, while under the other there is a surplus of nearly £300bn,” writes Mr Souter. “That’s a difference of some £700bn and it is an awful lot of the collective wealth of the nation potentially not being put to best use!”

He adds: “The reason for the difference can be out down squarely to the assumptions used about future investment returns and the low-return type of assets that many pension schemes are, increasingly, invested in.”

Mr Souter noted last month's Budget promised guidance for pension funds so they could invest in supporting innovative firms. The issue of intergenerational fairness was only touched upon.

By reversing the trends towards gilts and bonds, we could cut the cost of providing pensions. This could help ensure the same level of security for future generations that today’s pensioners enjoy.”