Pension reforms could improve financial outcomes in decades – but there’s no feel good factor any time soon

Published

2 years ago

July 10, 2023

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There are many areas where the British economy struggles to compete with its counterparts, but in one sector it is up there with the best in the world: finance.

And when it comes to finance, there is perhaps one event above all others which are developed to celebrating the City of London: the Mansion House banquet in the middle of summer.

This is when the great and good of the square mile mingle with some of the policymakers, central bankers and regulators discussing the issues of the day.

There have been plenty of controversies in the past.

A few years ago the event was gatecrashed by a Greenpeace protestor who was manhandled quite roughly out of the event by the then City minister Mark Field.

The banquet was occasionally a place of tension during the financial crisis, when questions raged about the conduct of the banking system and, for that matter, their overseers in the UK authorities.

And given there are questions growing about the UK’s economic policies – the Bank of England‘s in the face of a cost of living crisis and the government’s plans in the face of major green investments by the US – this is relatively safe territory for the chancellor.

He and the prime minister like the City of London – they believe it is part of the answer to how the UK economy can thrive in the coming years. They see it as an answer to their problems rather than a problem in and of itself.

So it’s perhaps fitting that Jeremy Hunt has chosen this as the forum to announce some quite technical but also quite important changes to the way the pensions system works.

How will UK pensions change?

In brief, the plan is to encourage UK pension funds to put a bit more of their money into private companies.

At the moment only about a percentage point or so of pension funds’ money (and we’re talking here about the defined contribution schemes most people are now members of) goes into private, unlisted funds.

The vast, vast majority is instead invested in government bonds and in funds that shadow share prices in the UK and around the world.

By contrast, pension funds in Canada, Australia and Japan put far more of their money into private companies; indeed there are many UK private companies which have big stakes from overseas pension funds.

The question is: why not UK pension funds? Part of the explanation comes down to various regulations which deter funds from anything but the very safest and cheapest investments.

The government’s argument is that by encouraging pension funds to put more of their cash into private firms, which often tend to see faster growth than unlisted firms, that should benefit those who have their money in UK pensions.

They think it could amount to an average increase in pensions (by the time you retire) of around £1,000 a year – though much of that depends on the future performance of these funds.

There are some question marks over the policy. For an illustration of one of them, consider a certain private company which seems to fulfil the government’s criteria: it’s private, it’s unlisted, and its main owner is a Canadian pension fund. That company is Thames Water.

Some would say that by encouraging pension funds to invest in private equity and unlisted firms – many of which don’t have the same scrutiny as those on UK stock markets – pension funds may be taking on more risk than at present.

The Canadian pensioners with much of their money invested in Thames Water may have mixed feelings about the regulations allowing their funds to put their cash there. That being said, the second biggest owner of Thames is a UK pension fund – the Universities Superannuation Scheme.

But the deeper issue is that while these changes to financial regulation could well improve outcomes in the following decades (they’re slow moving shifts in ownership that won’t have fully materialised until 2030) the government faces a more immediate set of crises.

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The cost of living burden is falling heavily right now. Its popularity is flagging. And the room for a pre-election giveaway is diminishing with every week.

The chancellor signalled in his speech that fighting inflation will come before any plans for a tax cut. In other words, none of the above will help improve the feel good factor any time soon.

Business

Government considering measure to slash industrial energy prices

Published

3 hours ago

June 19, 2025

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Government considering measure to slash industrial energy prices

Ministers are considering a commitment to cut soaring industrial energy prices for British companies to the same level enjoyed by competitors in France and Germany as part of its industrial strategy.

Sky News understands proposals to make energy prices more competitive are at the heart of final discussions between the Department for Business and Trade and the Treasury ahead of the publication of its industrial strategy on Monday.

Industrial electricity prices in the UK are the highest in the G7 and 46% above the median for the 32 member states of the International Energy Agency, which account for 75% of global demand.

In 2023, British businesses paid £258 per megawatt-hour for electricity compared to £178 in France and £177 in Germany, according to IEA data. Matching those prices will require a reduction of around 27% at a cost of several billion pounds.

Money blog: Interest rate held – but Bank of England gave ‘small surprise’

Earlier this month, automotive giant Nissan said UK energy prices make its Sunderland plant its most expensive in the world.

Business secretary Jonathan Reynolds is understood to be sympathetic to business concerns, and chancellor Rachel Reeves told the CBI’s annual dinner the issue of energy prices “is a question we know we need to answer”.

Extending relief

While around 350 companies in energy-intensive industries, including steel, ceramics and cement, enjoy some relief from prices through the energy supercharger scheme, which refunds 60% of network charges and is expected to rise to 90%, there is currently no support for manufacturers.

Sky News understands ministers are considering introducing a similar scheme to support the 200,000 manufacturing businesses in the UK.

Cutting network costs entirely could save more than 20% from electricity prices.

Explainer: Why are UK industrial electricity prices so high?

The mechanism for delivering support is expected to require consultation before being introduced to ensure only businesses for whom energy is a central cost would benefit. This could be based on the proportion of outgoings spent on energy bills.

It is not clear how the scheme would be funded, but the existing industrial supercharger is paid for by a levy on energy suppliers that is ultimately passed on to customers.

A central demand

Bringing down prices, particularly for electricity, has been the central demand of business and industry groups, with Make UK warning high prices are rendering businesses uncompetitive and risk “deindustrialising” the UK.

The primary driver of high electricity costs in the UK is wholesale gas, which both underpins the grid and sets the price in the market, even in periods when renewables provide the majority of supply.

Why are costs so high?

Wholesale prices account for around 39% of bills, with operating costs and network charges – the cost of using and maintaining the grid – making up another 25%, and VAT 20%.

Business groups, including the manufacturers group Make UK, have called for a reduction in those additional charges, as well as the so-called policy costs that make up the final 16% of bills.

These are made up of levies and charges introduced by successive governments to encourage and underwrite the construction of renewable sources of power.

Make UK estimate that shifting policy costs into general taxation would cost around £3.8bn, but pay for itself over time in increased growth.

Government sources confirmed that energy prices are a central issue that the industrial strategy will address, but said no final policy decisions have been agreed.

The industrial strategy, which is delayed from its scheduled publication earlier this month, will set out the government’s plans to support eight sectors identified as having high-growth potential, including advanced manufacturing, life sciences, defence and creative industries.

Business

Why are UK industrial electricity prices so high – and what can be done about it?

Published

3 hours ago

June 19, 2025

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Why are UK industrial electricity prices so high - and what can be done about it?

Britain has the highest industrial electricity prices in the G7, a cost businesses say makes it impossible to compete internationally and risks “deindustrialising” the UK.

Electricity prices are driven by wholesale fuel prices, particularly natural gas, but include taxes and “policy costs” that business groups, including Make UK and the CBI, want the government to cut.

Sky News understands the issue is a “live discussion” within government as ministers finalise the government’s industrial strategy, due to be published next week.

Money blog: Interest rate held – but Bank of England gave ‘small surprise’

So what are the options, and why are prices so high in the first place?

How much does UK business pay for electricity?

Industrial electricity prices in 2023 were 46% higher than the average of the 32 members of the International Energy Agency, a group that includes EU and G7 nations that, between them, account for 75% of global demand.

UK businesses paid an average of £258 per megawatt-hour, according to IEA data – higher than Italy (£218), France (£178) and Germany (£177), and more than four times the £65 paid on average in the USA.

While wholesale prices have been driven up in the last five years by external factors including post-pandemic demand and the Ukraine war, this is not a blip – UK prices have been consistently above the IEA average for decades.

Why are prices so high?

The main determinant is exposure to wholesale gas markets. Gas underpins the UK grid, reliably filling the gaps renewables and nuclear sources cannot fill. Crucially, gas also sets the price in the electricity market even when it is not the primary source of energy.

The UK market uses a “marginal pricing system”, in which the price is set by the last, and thus most expensive, unit of power required to meet demand at any one time.

That means that while renewable sources, initially offered at a cheaper price, may provide the majority of power in a given period, the price for all sources is set by gas-fired power stations providing the balance of supply.

Industrial electricity bills are lower in markets that are less exposed to gas. In France, gas sets the price less than 10% of the time because its fleet of nuclear power stations underpin supply.

What makes up electricity bills?

The biggest single element of electricity prices is wholesale gas costs, which make up 39% of the bill, according to industrial supplier SEFE.

The next largest element is “network costs”, charges imposed for using, maintaining and expanding the grid, which account for 23%. Operating costs are 2%, with VAT adding a further 20%.

The remaining 16% of electricity bills is made up of “policy costs”, levies and payments introduced over the last two decades to subsidise the construction of renewable power capacity, primarily wind power.

Increasing renewable supply and storage to reduce exposure has been the long-term solution favoured by successive governments. Sir Keir Starmer‘s administration has a target of shifting to a “clean power” grid by 2030 and achieving net-zero carbon emissions by 2050, a target Kemi Badenoch describes as “impossible”.

Some energy-intensive industries (EII), such as chemicals, steel, and cement, already receive support, with a 60% relief on network charges and a reduction of around 10% from the British Industry Supercharger fund, which the government is considering increasing.

What does business want?

Business groups are calling for these policy costs to be lifted and shifted into general taxation, calculating that a 15% reduction in prices would give them a chance of competing more equitably.

Make UK say cutting policy costs would cut 15% from bills, and is also proposing a “contract for difference” for manufacturers’ electricity, a model borrowed from the renewables market.

Under the plan, the government would guarantee a “strike price” for electricity 10% lower than the wholesale price. When prices are higher, the taxpayer would refund business, and when they are lower, industry would pay back the difference.

Make UK estimate the cost to the exchequer of £3.8bn. They believe it will be cost-neutral courtesy of increased growth. The alternative, they say, is an uncompetitive manufacturing sector doomed to decline.

“We need to see the government remove those costs in the industrial strategy,” says Make UK chief executive Stephen Phipson.

“We believe it will be cost-neutral because of the benefit to the economy of retaining manufacturing in this country. If we don’t see it happen, we will risk deindustrialising the United Kingdom.”

A government spokesperson said: “Through our sprint to clean power, we will get off the rollercoaster of fossil fuel markets – protecting business and household finances with clean, homegrown energy that we control.”

Business

Bank of England holds rate but eyes cuts ahead despite global risks

Published

9 hours ago

June 19, 2025

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Bank of England holds rate but eyes cuts ahead despite global risks

The Bank of England has signalled that a weakening labour market could yet trump rising global challenges to allow for more interest rate cuts in the near term.

Policymakers on the nine-member monetary policy committee (MPC) voted 7-3 to maintain Bank rate at 4.25%.

There was greater support than was expected for a cut.

The Bank had previously signalled that a majority on the committee were cautious about the effects of global instability – especially the on-off US trade war.

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But the minutes of the Bank’s meeting showed there was a greater focus on a rising jobless rate and evidence that employers are shedding jobs – indicating it had dominated the meeting.

It acknowledged, however, that there were potential challenges from the on-off US trade war and as a result of the Israel-Iran conflict.

The barrage of warheads has already resulted in double-digit percentage spikes to oil and natural gas prices in the space of a week.

“Interest rates remain on a gradual downward path,” governor Andrew Bailey said while adding that there was no pre-set path.

“The world is highly unpredictable. In the UK we are seeing signs of softening in the labour market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation,” he added.

The Bank maintained its core message that it would take a “gradual” and “careful” approach.

“Energy prices had risen owing to an escalation of the conflict in the Middle East. The committee would remain vigilant about these developments and their potential impact on the UK economy,” the Bank said.

The rise in the UK’s jobless rate, along with recent data on payrolled employment, has been linked to a business backlash against budget measures, which kicked in in April, that saw employer national insurance contributions and minimum pay demands rise.

While a weaker labour market, including a fall in vacancies, could allow room for the Bank to react through further interest rate cuts, the spectre of war in the Middle East is now clouding its rate judgements.

The last thing borrowers need is an inflation spike.

The UK’s core measure of inflation peaked above 11% in the wake of Russa’s invasion of Ukraine – giving birth to what became known as the cost of living crisis.

Inflation across the economy was driven by unprecedented spikes in natural gas costs, which pushed up not only household energy bills to record levels but those for businesses too – with the cost of goods and services reflecting those extra costs.

Borrowing costs have eased, through interest rate cuts, as the pace of price growth has come down.

The rate of inflation currently stands at 3.4% but was already forecast to rise in the second half of the year before the aerial bombardments between Israel and Iran had begun.

LSEG data shortly after the Bank of England minutes were published showed that financial markets were expecting a quarter point cut at the Bank’s next meeting in August and at least one more by the year’s end.

Commenting on the Bank’s remarks Nicholas Hyett, investment manager at Wealth Club, said: “Conflict in the Middle East risks higher energy prices potentially pushing inflation higher – though calling the course of events there is almost certainly a mugs game, and the Bank has said that under current conditions it expects inflation to remain broadly at current levels for the rest of the year.

“The risk is that all the uncertainty leaves the Bank paralysed, with rates stuck at their current level,” he concluded.