THE NEW pensions minister, Torsten Bell, continues the government’s desperate hunt for investment funds. His plan, or rather the plan he inherited from Tulip Siddiq, is to merge smaller local government pension funds into larger superfunds with at least £25billion under management. These, he thinks, will be ‘better able to invest in more productive asset classes . . . and that’s precisely because they can take a wider range of risks and build more sophisticated investment capacity’. Why does he think that? Does he not understand his own jargon?
‘More productive asset classes’ are ones that yield more return on investment. The reason they can do that is that they are taking higher risks so investors seek higher rewards. The key risk is that the investee company goes bust, as which point the pension fund loses both the capital that it invested and the returns that capital would have made over decades. That damages the pension pot, meaning that either other assets must do better or your pension won’t be as large as you hoped.
For this reason pension funds are (rightly) constrained in what investments they may make. While a small proportion of any fund will be allocated to (relatively) high risk/high yield investments, the overwhelming majority are invested more conservatively with the aim of seeking the best returns at lower levels of risk. Whether that high-risk money is invested by a £25billion superfund or ten £2.5billion smaller ones makes little difference. Indeed having ten different investment policies as opposed to just one might give a better, wider view and certainly a more plural one.
In the same speech Bell whined about the low investment in the UK by UK pension funds. He trumpeted that changes to the planning laws would enable more investment opportunities in wind and solar farms. Before he was an MP, Bell ran a think tank, and before that he worked in the Treasury, becoming an expert on child poverty. And before that he read PPE at Oxford. He’s clever and academic. That doesn’t stop him being wrong.
Pension funds invest where they can make the best returns at any level of risk. As the post Cold War world opened up and globalisation took hold, more countries had more companies listed on more stock exchanges. The plethora of investment opportunities widened and, as is their duty, the pension fund managers went with them. This led to the rise of the BRICS group (including Brazil, Russia, India and China) and gave the pension funds a much wider geographic spread of risk. UK pension fund investment in the UK has fallen, largely because other countries offer higher rewards at the same level of risk. Bell’s plan to merge funds won’t change this fundamental reality.
Neither will his hope that these larger funds will invest in UK infrastructure. They’re already doing that but again, they balance risk and reward. Bell, like his mentor Ed Miliband, is an enthusiast for Net Zero. The capital costs of the green transition are vast, well over £1trillion. The entire UK pension industry has only £3trillion of funds in it. There is no way that they can get close to covering the construction costs of the Net Zero delusion. And there’s no way that they should – the job of a pension trustee is to deliver a pension in a couple of decades, not pander to the whim of a green fanatic.
The government’s (perceived) problem is that pension funds are not investing in the UK. If the government wish to alter that they need to make investing in the UK more attractive, best done by increasing the returns and reducing risk. If they achieved that it would not just be UK pension funds investing more, every fund across the world would be. An increased availability of capital might also free up investment in growth companies (generally too risky and too small for pension funds to invest in.) There are two simple things that the government could do to help.
The first is to drop the ludicrous and, as is becoming evident, disastrous Net Zero ambition. The UK industry has the most expensive electricity in the world. That’s unsurprising, given the UK spends some £40billion a year on green energy subsidies. That’s about 10p per kWh. If energy costs fell profits would increase for every company. That would free capital for funding growth and for paying investors a little more. That in turn would trigger pension funds, and every other investor, to allocate more capital to the UK.
There is no significant financial cost to ending Net Zero. In a cash-strapped country (annual government deficit £127billion and growing) desperate for growth, slapping £40billion on to energy bills makes no sense. Dropping Net Zero would put £40billion back into company coffers, for distribution to investors and for investment in the future. Sure, the Greta-lovers would kick up, but only the BBC is listening.
The second thing the government could do to deliver growth and attract pension fund investment is to reduce the rate of corporation tax. Again, this would leave more corporate profits available for both investment and paying a higher return to investors. Corporation tax receipts total some £85billion a year. Everything else being equal (which of course it isn’t) a 1 per cent reduction in the corporation tax rate would reduce the governments income by about £3billion. Much of that £3billion would stay in the UK: only some 2,000 of the UK’s 5.6million companies are listed on the London stock exchange, but they all pay corporation tax. That cash could then generate growth. That is what happened in Ireland, which reduced its corporation tax rate from 36 per cent to 12.5 per cent in 1997 to 2003 and watched its tax receipts soar. There’s no reason why the UK could not achieve the same thing, except for the government.
However all this is mere tinkering and an attempt to coerce private UK money to invest in the UK. The pensions minister has not yet addressed the two elephants in the pensions room, namely the state pension and public sector pensions.
The state pension is not a pension, as there is no fund behind it. There is no National Insurance fund. Working people are taxed to pay the state pensions of the retired. It’s a welfare payment, not an entitlement. The fact that my generation were dumb enough to pay the pensions of my parents’ generation does not entitle me to expect the same from my children. (I don’t, which is why I drive a truck.) The state pension costs £137billion a year, the same as universal credit and child welfare combined.
Tinkering with pensions is, of course, a tough political sell. So what? Politicians claim to make the ‘tough’ decisions. Try explaining to someone working on the median wage (£680 per 40-hour week pre-tax) why 10 per cent of their tax should fund a retired person on £220 per week for doing diddly squat. Most other benefits are means-tested, and the pension should be too. Yet in the land of the triple lock that’s thought to be electoral suicide.
Public sector pensions are more obscure, as they’re mostly paid out of departmental budgets. For example, 9 per cent of the defence budget goes on paying armed forces pensions to ex-service personnel. That’s £4.9billion a year that comes from the tax take and is not available for defending The Realm. Across all departments the total public sector pension liability is some £1,400billion, of which 75 per cent is unfunded. That will be paid from departmental budgets, the funds coming from the long-suffering taxpayer.
The unfunded state and public sector pensions consume 15-20 per cent of all government spending. Were these pensions properly funded there would be no deficit, taxation would be commensurately lower and we would almost certainly have a growing economy with decent infrastructure. There would certainly be more pension funds with more money to invest in the UK and the rest of the world.
There is, of course, no overnight fix. However, transitioning the public sector into private pensions is far from impossible and, correctly done, would reduce government payroll costs while creating yet more capital to be invested.
Whether Torsten Bell is clever enough to change this is as yet unanswered. Seeking to force private pension funds to invest in UK against their best judgment is a rotten start, tantamount to the nationalisation of private wealth. If this benighted government carries on down this route things will get much worse. So far some 11,000 millionaires have quit the UK since the election. Others will be moving their money to safer and more profitable places. That’s capital flight, which will stymie any hope of growth and lead to ever-increasing costs for UK government debt.
As John Donne didn’t quite write, ‘Send not to know for whom Torsten Bell tolls, he tolls for the entire UK economy.’
