Pension reform is key to boosting investment and recovering the stock market | Pensions sector

Chancellor Rachel Reeves’ announcement of a major overhaul of Britain’s pension fund system could rival Gordon Brown’s creation of an independent Bank of England in economic significance.

It is incredible that less than 2% of the £2.5 trillion of assets managed by more than 30,000 – often very small – pension funds are invested in British companies, either on public markets or as unlisted start-ups and scale-ups. This is a disgrace, because it serves neither the economy nor pensioners: radical reform, as I argue in my new book, This time, no mistakeis a prerequisite for higher growth.

This revision confirms the limited ambition of last week’s pensions bill. First and foremost, Britain needs fewer and much larger funds than the smorgasbord of tiny, underperforming funds whose trustees guard their independence so jealously that the property market seems reluctant to speculate. Only very large funds, ideally over £100bn, can diversify risk sufficiently to be able to invest more in the full range of productive assets, including those in the UK, to boost returns, stimulate the economy and improve pensions.

Two important objectives are identified. First, to explore ways to pool risks and consolidate the rapidly growing but often tiny multitude of defined contribution schemes. Second, how to energise the glacial consolidation of local authority pension funds. This could yield £1 trillion in productive investment. Equally important is the additional £1.4 trillion sterilised in closed defined benefit pension schemes.

They need a guarantee (or ‘backstopping’) to persuade trustees to release £225bn of stagnant surpluses and for another 2,000 very small and closed defined benefit pension schemes to agree to be merged into the very successful Pension Protection Fund.

Do all this, and Britain will finally have the investment funds it needs to turn around its flagging stock market – and spark an investment boom.

• Will Hutton writes for the Observer and is co-chair of the Purposeful Company