I do not want to come across as rude, but I am not sure that Rachel Reeves has quite earned her spurs as an asset allocator. Yet the chancellor, continuing a vein of thinking started by her Conservative predecessor Jeremy Hunt, wants to redirect your retirement savings in service of the ailing economy.
The Treasury confirmed last week that it would create a “backstop” power that could be used to compel big pension funds to invest in UK assets. This is one of three pensions measures designed to boost growth and prop up the sagging stock market — the others being merging defined-contribution (DC) and local government schemes into “megafunds”, and making it easier for sponsors to dip into defined-benefit (DB) surpluses.
None of this is a very good idea.
It is true that pension funds’ long retreat from UK stocks and assets has contributed to low valuations and weak growth, but it is far from the main factor.
Looming larger have been the global dominance of the US stock market, the UK market’s bias towards old-world companies, and the long hangovers left by the 2008 financial crisis and Brexit. Forcing funds to buy British is unlikely to make much of a dent in the problem, and politicising investment decisions violates trustees’ fiduciary duty to act in the best interests of members.
The “voluntary” deals announced by Hunt and Reeves — in which pension schemes promised to invest up to 5 per cent, and then at least 10 per cent, of their portfolios in private markets and the UK by the end of the decade — turned out to be the thin end of a precedent-setting wedge.
The argument for consolidating DC funds is marginal. And the risks inherent in freeing up DB surpluses are obvious, even if trustees still need to give permission.
Remember the contribution “holidays” taken by employers in the 1980s and 1990s, and the explosion of monstrous deficits in the noughties?
Funding positions are volatile and highly sensitive to interest rates because bond yields are used to discount the present value of future payments. Lower rates and yields mean bigger deficits. The super-cheap-money era of the mid-teens was dreadful for defined-benefit schemes.
I did my PhD on Sir Philip Green, who attempted to dump BHS and its £571 million pension deficit (he eventually paid £363 million towards the hole). I am convinced that part of the reason Green hung onto BHS for so long was his (not unreasonable) belief that rates would rise. They didn’t — at least not for several years. On the measure the government might use, DB schemes have £160 billion of surpluses now. But that number could come down quickly if the Bank of England decides to cut rates aggressively for any reason.
Ministers hope that sponsoring companies will use surplus windfalls for “productive” investment purposes, but the Pension Insurance Corporation — which looks after old DB schemes and is campaigning against the idea — says they are likelier simply to pay them out as dividends.
I should add that most of these proposals affect only private-sector pensions, not public-sector ones, because the generous pensions paid to public-sector workers are generally “unfunded” — that is, not backed up by portfolios of investment assets but paid out of contributions from the current generation plus taxpayers’ money. Based on past performance, the buy-British edict will cost private pensioners.
Over the past ten years, UK equities have returned 84 per cent, while Europe has delivered 120 per cent and the US 277 per cent, according to the investment platform AJ Bell.
There is a groundswell of support for the yoking of pensions to political ends, much of it from vested interests who stand to benefit from even slightly increased flows into capital markets.
The kitchen-sink analogy seems to apply in describing a widespread attitude towards the UK stock market and economy: let’s throw whatever we have at these causes, no matter the impact on other stakeholders.
The deregulatory blitz is part of the same domestic projectile-launching. To adapt another cliché, at a time of straitened public finances, the growth tail seems to be wagging every dog other than the one that would really help: tax.
• Being boring is no guarantee of safety for Rachel Reeves
I have often argued for broad-based measures to encourage investment in UK assets, rather than targeted interventions. The latter — picture a wonk in Whitehall operating a giant set of robotic arms over the economy — rarely work as intended.
Cutting stamp duty on shares, reinstating the dividend tax credit abolished in 1997, ending energy windfall taxes, lowering capital gains, reversing the inheritance tax raids on farms and family firms, softening the assault on non-doms — a combination of any would start to improve the overall business environment. But each would cost money today, which is why we are ripping out kitchen sinks instead. And as I said at the beginning, there has been cross-party consensus on this, despite the Tories’ histrionics now.
Heathrow’s sleepy pilot
The review of March’s Heathrow shutdown by Ruth Kelly, one of its non-executives, found that the airport took the right steps after a huge power cut, but said that its chief executive slept through the incident.
Thomas Woldbye was in bed with his phone on silent during the night of March 20. He awoke to the chaos of 1,300 flight cancellations at 6.45am, the key decisions having been taken by his deputy.
• Heathrow boss slept through shutdown as ‘phone was on silent’
Chief executives need their downtime like anyone else. But for the boss of a major piece of infrastructure to be contactable via a smartphone alone? No secure landline? No alarm system? No knock on the door from a harried executive assistant? It can’t have been a nice morning.
