‘’Making Pensions Work’: dealing with the obvious questions

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Finance for the Future’s report ‚ÄòMaking Pensions Work’ raises a lot of questions and makes many recommendations. This naturally gives rise to a whole range iof potential queries which the report itself does not address, but which I look at here:

Are you suggesting that there should be no more tax relief on pensions?

No, not at all. What we are saying is that there should be conditions on being given that tax relief, and the condition is that at least one quarter of the funds subscribed should be invested in new economic activity in the UK. So long as the fund meets this condition then it will continue to attract tax relief.

How could we be sure that these conditions are met?

In two ways. First, pension regulators will need to check this. Second, those seeking to attract pension fund cash will have to have the investment opportunities they offer approved as suitable to meet the new pension fund investment conditions. All new government bonds would qualify as a matter of course. Anything else would need approval. That, however, increases the degree of scrutiny of what pension funds are doing. Second, we’re recommending that pension funds must publish accounts and make them readily available to their members, which is almost unknown at present. This will increase their degree of accountability.

How do you stop a person like the late Robert Maxwell abusing these new rules?

At present pension funds are almost entirely opaque: it is almost impossible to find out what is happening in them. We’re proposing making them a lot more transparent and making what they investor in the subject to regulator scrutiny. In combination the risk of abuse should reduce, significantly.

Won’t pension trustees just refuse to do this?

Of course trustees could refuse to invest as directed by the proposed changes to the law we suggest. But if they did their fund,and those making contributions to it would not enjoy any tax relief. 

Won’t trustees say they have a legal duty to resist this change in case if does not maximise pension fund returns?

Given that existing pension fund returns have been so abysmal for so long it is hard to see what justification for refusing these investments they could have on this basis. But it is true that at present pension fund trustees do believe they have a legal duty that over-rides all ethical and other considerations (in most cases) however they might do so – including (or in most cases, almost exclusively) by speculating. However the changes we recommend would change that legal duty with regard to part of their fund and so they could not be in breach of their duty by investing as we suggest.

What’s the risk pension returns will suffer as a result of this change?

There is very little risk that pension returns will suffer as a result of the recommendations we’re making. Firstly, investment returns by pension funds over the last decade have been so abysmal over the last decade because of the dedication of pension fund mangers to holding their assets in the form of shares, which have on average lost value at the rate of 2% per annum during that period, meaning that any fixed rate of return will increase pension returns. Second, pension funds will still be allowed to invest 75% of their incoming funds in their current chosen mix under the proposed new arrangement. Thirdly, there i no reason why shares cannot qualify for the new type of investments to which pension funds must subscribe – it is just that they must be new shares issued to create new jobs, products and assets. There is every prospect that this new structure, by requiring a focus on long term investment will increase pension fund returns.

How much will be invested in new jobs as a result of this proposed change?

Currently more than £80 billion a year is invested in pension funds. £20 billion or so of this would have to be invested in new type investments if all existing funds wished to keep their tax reliefs. That’s a massive boost for UK business – indeed, it’s the sum the CBI recently called ion the UK government invest to stimulate the economy.

What sectors are likely to benefit from this investment?

Given that business is in the doldrums right now we suspect that much of this money will be invested in the public sector at present. It could, for example, deliver much of Labour’s now abandoned school building programme through the issue of hypothecated bonds, avoiding the need for expensive and costly PFI schemes. It could deliver the Green New Deal. It could provide the capital for a Green Investment Bank. And all these could pay the necessary rates of return required, without difficulty. And of course it could also deliver a wave of new innovation by providing essential new capital to new private sector enterprises.

Are there risks?

Compared to existing pension arrangements, no.