IIn these desperate times, everyone wants to find some money on the back of the sofa. Politicians are no exception. It’s difficult to raise taxpayer money – look at the growing concern in the Conservative backbenches at the billions of pounds Chancellor Jeremy Hunt has raked in from the protracted income tax ceiling freeze.
Borrowing from international investors was extremely cheap until recently, but since Liz Truss and Kwasi Kwarteng’s mini-budget debacle last September, finance ministers have been unable to consider increasing public debt as a cost-effective measure. Short-dated government bond yields are back to truss-era levels, increasing the cost of government bonds.
And so the search for free money continues and has most recently stumbled upon the trillions of pounds lying around in UK pension funds.
Hunt is interested and expressed this in his last draft budget when he described the potential of pension money to unlock investment opportunities. Shadow Chancellor Rachel Reeves has repeatedly mentioned pension funds in recent speeches, saying they could help kickstart the long-term growth Britain sorely needs.
A recent Tony Blair Institute (TBI) report calls for an unprecedented consolidation of multiple operational systems across a range of superfunds.
It’s a sound argument, like many before it: if just a fraction of that Himalayan money hoard could be reallocated to productive projects, Britain could return to its glory days and become the engine of global growth once more.
Unfortunately for the writers, this narrative is unlikely to reach its necessary conclusion without killing one game of Thrones-style cast of villains.
They also include wealth managers intoxicated by each pension fund’s commissions and fees. Then there are the followers who add another layer of charges – the lawyers and accountants. And the actuaries who provide the “science” at the heart of systems have often been proven wrong in their judgments of how long we will all live and how much money we will need to live before we die.
Then there are the post-Robert Maxwell accounting rules and protections that wrap systems in layers of legal protection. These rules may force pension administrators to be overly cautious, but they are the rules.
In his March budget speech, Hunt said his fall statement would include measures “to unlock productive investment from defined contribution pension funds and other sources.”
There is speculation he may say a little more about his ideas in his speech at Mansion House next month. It is understood that he read and liked the TBI report. What is less clear is how any of this can be implemented when previous governments have already implemented such ideas and found it impossible to assassinate the city’s pension administrators, rewrite the pension rulebook and practically instruct private pension savers to take additional risks with their money.
Superfunds are the answer, say the report’s authors, with most existing schemes grouped into just a handful in the private and public sectors. The schemes would be better managed by the Pension Protection Fund (PPF), it said, which already has a mandate to invest £40billion worth of funds without a supporting employer, usually because the employer has gone bust.
The PPF has a strong investment track record and has experienced an average of 9% investment returns versus an average of 6% for the 4,000+ existing solvent systems. However, it is a non-profit organization with a government guarantee backing its obligations to its members. If the PPF were to take over 4,000 currently viable schemes – from the BP and BT schemes to those of small manufacturers – at the current level of benefits, Hunt would certainly become a key guarantor of the pension system, while the PPF is currently just a backstop is?
Even if he were to accept becoming a guarantor of this magnitude, he would have to encourage the PPF to invest in projects that carried a higher risk than anything it has done before. Will Hunt take on that responsibility?
Alecta is a system that manages the pensions of 2.6 million people and 35,000 companies in Sweden. Net worth is £80 billion. It’s a super fund. In April, her boss lost his job after incurring huge losses at mid-sized US banks, including Silicon Valley Bank, which went bust. It shows that there is no free lunch.
However, Hunt could consolidate the 86 funds that make up the £340bn municipal pension scheme. They work the same way for their 6.1 million members. The government already has direct control and could dictate terms.
Hunt could get started with these funds – though they are largely tied to Tory councillors, who see their pension systems as a source of prestige and power. They will defeat him, just as more comprehensive reform will prove too difficult.