Andrew Bailey has warned the Government not to force pension funds to invest in British assets.
The Bank of England Governor said he would not “for a moment” support the idea of forcibly making pension funds back British companies, even as he conceded that policymakers had “a lot of work to do” to improve outcomes for savers.
Speaking at the Institute of International Finance, Mr Bailey said there was an urgent need to harness Britain’s fragmented pensions system to support the UK economy.
However, he warned policymakers against introducing rules forcing funds to invest a certain level of assets into Britain.
Mr Bailey said: “I think in the UK, we have a lot of work to do on the pension system. I don’t for a moment support a compulsory allocation of pension money to UK assets.”
He added there was a need to address “relatively weak investment” in the UK, as well as a need to reform a pension industry that he described as “quite fragmented and isn’t investing in the UK real economy”.
Mr Bailey added: “I don’t believe in compulsion for a moment. These are markets that have to operate, but you can’t get away from the question.”
Rachel Reeves is currently exploring ways to boost investment and increase the size of investable pension pots under a review of the system.
Ms Reeves told reporters earlier this month that the UK’s drive would focus on consolidating many smaller private sector pensions into larger pools.
She said: “I’d like to see consolidation in the sector, but would want to do that not through mandating but through being much clearer around the obligations on pension funds to deliver for people saving for retirement.”
Britain’s largest pension fund has already warned that mandating investment in UK assets would not be in the best interest of savers and breach its duty to pensioners.
USS, which looks after the retirement savings of Britain’s academics, said any mandating would be “wholly inconsistent” with trustees duties to savers.
The International Monetary Fund also warned this week that plans to channel more pension savings into riskier assets pose a growing threat to the UK’s financial systems.
The Fund said nervous savers around the world who dump pension investments in a panic threatened to overwhelm a rapidly growing industry, raising the risk of a Neil Woodford-style collapse.
Mr Bailey on Wednesday also signalled that the Bank remained on course to cut interest rates again in November, saying that inflation around the world had fallen faster than expected.
“The disinflation – and the UK is part of this – has actually taken place faster than we expected it to.”
He said that fears that higher inflation would fuel an upward spiral of pay and prices had also receded.
“I think that has been a good story, and that’s why I think central banks generally have been able to start cutting rates sooner than we were expected to a year ago.”
Inflation, as measured by the consumer prices index (CPI), fell to 1.7pc in September, below the Bank’s 2pc target. Investors expect rates to be cut to 4.75pc from 5pc next month.