Pensions » Tax Research UK

Pension funds: it’s time they were accountable to their members, so here’s how to do it

Jan 092012

A commentator on this blog this morning has made an excellent point on pensions:

It used to be the case that most employers’ pension schemes in the private sector were defined-benefit schemes. When that was the case, the pension beneficiaries didn’t get much of a say in the decisions made by the scheme’s trustees. Fair enough- after all, it’s the employer that is on the hook if the investments don’t perform, the only agreement with their employees is to pay the pension at the agreed rate.

Now though, everything has changed, most private sector schemes are defined-contribution. The risk has been switched from the employer to the employee, so if investments don’t perform in the long term, it’s the pensioner who suffers if poor decisions are made. Yet, they’re still isolated from virtually all the decision making, that all happens at the fund level. It doesn’t seem morally right for employees to suffer the consequences of poor long term shareholder decisions, without having any input into what is decided on their behalf.

This would, however, require that the accounting of pension funds be radically reformed. I gave this some thought a while ago, but never published it at the time. Given the topicality of the issue – and the relevance of this context, let me do so now.

What I put together was a checklist of what I would like to see in the accounts I would wish my defined contribution funds would send to me each year instead of the incredibly simple note I get now that says, in essence that I contributed £X pounds of which they lost me £Y and charged £Z in fees, leaving me with a reduced annual pension expectation of £W a year at some dim and distant date in the future. That checklist of what I wanted was this:

Pensionholder capitalism - the information needs

1: Who runs the funds

1.1: The name of the company

1.2: A summary of their accounts

1.3: Full details of where and how their full accounts can be obtained

1.4: The name of the fund in which the prospective pensioner has invested

1.5: Where the constitution of that fund can be obtained from, and how

1.6: The names of the individual pension fund managers responsible for the fund and for each such manager:

1.6.1: Their age

1.6.2: Summary CV

1.6.3: Qualifications to undertake the task entrusted to them

1.6.4: Their remuneration

1.6.4.1: Linked between basic pay and bonuses

1.6.5: Any other appointments they have

1.6.6: Any conflicts of interest they might have e.g. personal shareholdings

1.7: The method of changing the fund managers available to the prospective pensioner

2: What the fund has done

2.1: What its income was in a year, split between:

2.1.1: Dividends

2.1.2: Interest

2.1.3: Rents

2.1.4: Hedge funds

2.1.5: Private Equity

2.1.6: Profits and losses (each stated separately to come to a net disclosed figure) from trading investments split between

2.1.6.1: Equity shares

2.1.6.2: Corporate bonds

2.1.6.3: Government bonds

2.1.6.4: Property

2.1.6.5: Cash related activity e.g. foreign exchange trading

2.1.7: Income from other sources

2.1.7.1: Stock lending

2.1.7.2: Fees

2.2: Volume of trading

2.2.1: Gross purchases and sales of each of the following netted to produce a net movement

2.2.1.1: Equity shares

2.2.1.2: Corporate bonds

2.2.1.3: Government bonds

2.2.1.4: Property

2.2.1.5: Hedge Funds

2.2.1.6: Private Equity

2.2.1.7: Cash held in other currencies

2.3: Costs of trading

2.3.1: Split by category, as noted above

2.4: Movements in value of assets in the year, not yet realised

2.4.1: Increases and decreases in value for each of the following, each then netted to a total

2.4.1.1: Equity shares

2.4.1.2: Corporate bonds

2.4.1.3: Government bonds

2.4.1.4: Property

2.4.1.5: Hedge Funds

2.4.1.6: Private Equity

2.4.1.7: Cash held in other currencies

2.5: Administration and other costs

2.5.1: Salaries

2.5.2: Research

2.5.3: Overhead costs

2.5.4: Management fees to parent institution

2.5.4.1: NB if the previous three categories are included in a management fee an indicative split of the management fee into these categories should be given

2.5.5: Audit fees

2.5.6: Regulatory fees

2.5.7: Other costs

2.6: Surplus for the year

2.6.1: The surplus or deficit for the year allocated by sub fund if appropriate

3: What the fund invests in

3.1: A balance sheet for the fund

3.1.1: Investments

3.1.1.1: See separate notes below

3.1.2: Current assets

3.1.2.1: Split in the format required by Company Accounts

3.1.3: Current liabilities

3.1.3.1: Split in the format required by Company Accounts

3.1.4: Member funds

3.1.4.1: Opening funds plus contributions less the result for the year equals closing member funds

3.2: Investments

3.2.1: Detailed notes required by asset category showing value brought forward, additions, disposals and movements in asset value - to reconcile with notes in the statement of what the funds has done - leaving closing cost

3.2.2: Equity shares

3.2.3: Corporate bonds

3.2.4: Government bonds

3.2.5: Property

3.2.6: Hedge Funds

3.2.7: Private Equity

3.2.8: Other

3.3: Investment analysis

3.3.1: List the top 100 investments by value at the start and end of the year and note the following for each

3.3.2: Name

3.3.3: Type of asset by category already noted

3.3.4: Proportion of the fund invested in the asset and proportion of the asset held (e.g. what percentage of the company invested in is owned)

3.3.5: How the asset invested in generates its income .e.g. what use is made of a let property, what trade a company pursues

3.3.6: Whether the investment is considered ethical, referencing an accepted standard

3.3.7: Whether the investment is in a low tax jurisdiction (headline corporate tax rate of less than 20%)

3.3.8: Value at the start of the year

3.3.9: All purchases

3.3.10: All sales

3.3.11: Profit or loss

3.3.12: Value at end of year

3.3.13: Total income received

3.3.14: Income of highest paid director in company invested ion

3.3.15: Whether the fund voted against any resolutions put by the company in the year and if so what on and why

4: Other information

4.1: Future investment policy

4.2: Green policy

4.3: Ethical policy

Now that may look like a lot, but if I pout money in a company I get a set of accounts that complicated, and can quit whenever I like. If I put money in a pension fund I get virtually no data, may be dependent on the outcome for the rest of my life, and have almost no way of quitting. And candidly, any fund must have this information to manage itself.

This would really transform accountability and since now we take the risk on pension funds it’s high time this happened.

So which party is going to take this one on?

At the core of the crisis for the elderly in this country is the greed of a few in the City of London

Accounting, Banking, City of London, Economics, Pensions 4 Responses »

Jan 092012

Ian Fraser is a journalist for whom I have a lot of time, and respect. I warmly endorse a blog he wrote this weekend on the subject of this week’d edition of The Economist in which he wrote:

I was surprised and disappointed when I opened my copy of The Economist on Friday morning.

The magazine is running a feebly-argued propaganda piece headlined “Save the City” as its cover story. The piece vaunts the “skills” that are to be found in the City of London and seeks to persuade us that having a powerful financial sector is critical to the future health of the UK economy and that the “Square Mile” must therefore be cherished and preserved at all costs. The cover image harps back to the Blitz, as if Hitler’s Lufwaffe is once again poised to carpet bomb a key part of our heritage.

Outside PR puff sheets like HBOS’s absurd “Deal Leaders” of 2005-08 and the Pravda-style advertorials inserted into newspapers and magazines to launder the images of evil dictatorships, I’ve rarely read such a farcical or misleading article.

That’s harsh criticism, but true.

There’s much to note in the piece, but I’d highlight this:

The magazine’s “Save the City” leading article is one-sided, snide, racist, xenophobic, and makes massive omissions. It doesn’t even start to acknowledge the multifarious failures of the financial sector, or the damage it has wrought on the UK economy in recent years. The article fails to mention the massive risks posed by “crony capitalism” and “regulatory capture”, including wilful blindness to fraud, and even includes the words –

“Finance—the funnelling of savings to their best use—is a vital industry. Britain is very good at it, leading the world in various financial markets, including foreign exchange and over-the-counter derivatives. “

Who wrote this garbage I wonder?

Yes, the City did once fulfil the function of efficiently allocating capital, but that stopped some ten to 20 years ago when the ‘zero sum’ game of financial speculation for the self-enrichment of the participants took over.

As I have said before the City has, with a few exceptions, become the cuckoo in the nest of the UK economy.

It has become gigantic skimming machine/casino. In addition to making taxpayer-underwritten bets, however absurd, it largely serves to diminish the savings and pensions of UK citizens, though outrageous fees, spurious and unwarranted trading and an intermediated structure that favours the interests of the people that work in its own, often-conflicted institutions (plus the people in their various suppliers including brokerages, law firms, accountancy firms, investment and actuarial consultancies, etc, etc) over and above the long-term interests of savers and the needs of the wider economy.

Of the City’s many crimes this destruction of an effective pension mechanism for the UK – where the future prospects of millions are literally traded away for the current gratification of a few in the Square Mile is perhaps the greatest. It is unsung, it is unchallenged and it is ongoing. And it’s time the politicians of this country changed that, because at the core of the crisis for the elderly in this country is the greed of a few in the City of London.

Fill marks to Ian for highlighting it.

If there’s one thing to stop in 2012 it’s the new NEST pension scheme

Pensions, Uncategorized 4 Responses »

Dec 292011

As the FT notes today:

Retirement planning is set to change irrevocably in 2012 as, later in the year, “auto enrolment” is expected to see millions of workers start saving in a company pension scheme for the first time.

From October 1, all workers aged between 22 and the state pension age, and employed by a company with 50,000 or more staff, will be automatically en-rolled into their employer’s pension scheme – unless they ask to opt out. This new government policy will be rolled out to smaller employers from 2013.

I do, of course, want people to have decent pensions. And I am entirely happy that employers should contribute, but this pension scheme is going to be an outright disaster for the UK, for those forced into these schemes and for the economy as a whole.

But let’s be clear, this is going to be an economic disaster. the scheme was designed in 2006 and is built around the obviously failed logic of that era. So employees will be forced to invest in the stock exchange – just increasing the boom and bust cycle – and not a penny will go into creating new investment or new jobs.

As bad, this will be saving at a time when we have too much saving and not enough investment or even consumption to create the jobs we need. S0 this will just add to the imbalances in the economy.

This is the wrong pension plan at the wrong time with guaranteed disastrous outcomes. It’s one of the things I’m not looking forward to in 2012.

The average rate of return on shares in London in the last 10 years is MINUS 0.1% – so why are pensions invested in them?

Economics, Pensions 15 Responses »

Dec 192011

The Observer noted yesterday that:

Highly paid City traders are depriving pensioners and savers of thousands of pounds through high management fees that are often hidden, according to leaked advice provided by consultants to the Treasury. The charges are spreading and are so steep that savers may find they get less back in retirement than they invested in savings accounts and pensions over their lifetimes.

This is just about inevitable. Referring to a City of London publication on the equities market, produced in October 2011, shows that the average rates of return on equities have been as follows:

Pension saving is long term. Over the long term the returns, expect in the small German market and even smaller Swiss market, have been negative. Globally they are 0.5%. Annual pension charges are at least 1.5% in most funds. After dealing costs absorb returns they rise well above that.

As I have argued in People’s Pensions in 2003 and more recently in Making Pensions Work, investing pension money n equities did not in 2003 and still does not now make any sense at all. Losses are virtually guaranteed and the City rakes off billions – in my estimate up to £30 billion a year from pension funds – for the privilege of losing it for the ordinary people of this country. This is blatantly capturing the benefit of the common good of pensions for the benefit of a few. No wonder, as I showed in Making Pensions Work, that this industry is incapable of generating any returns at all to pay pensions - which is why all pensions in this country are currently effectively paid for by the state when the cost of pension tax relief is taken into account.

The disaster is that in 2013 millions more people will be compelled to throw money at the City each month. The National Employment Savings Trust – designed in 2006 in another economic era – is intended to force low paid employees to give 4% of their earnings to the City to lose for them month in and month out from 2013 onwards. This will be a disaster for the economy where enforced savings is currently the last thing we want, and it will be a disaster for these savers.

I have met this fund and they refused to consider the alternative of a fund invested in infrastructure as I have proposed. Conventional wisdom has to be followed they say. Which means that these people will be ripped off as are almost all pensioners now, and all to benefit the 1% in the City.

When will we stop this pensions madness?

Making Pensions Work lays out the alternatives.

The way to solve the private pension crisis

Economics, Pensions, Uncategorized 16 Responses »

Dec 012011

The focus on state pensions yesterday, and the successful strikes on this issue, had the additional benefit of highlighting the real pension crisis in this country, which is that it is the private pension sector that is really failing.

There are good reasons for that, and all intensely logical.

First, employers have removed provision to increase profits. It’s not that they can’t afford it. Over the last 15 years or so about 5% of GDP has been shifted from payments to labour to payments to capital in the form of profits in the economy – that’s near enough explained by the refusal of employers to fund pensions. This is a minority taking income and wealth now to deny it to those in old age. The unaffordability argument simply does not stack.

Second, the rate of return on pensions has been abysmal. with it still being the case that up to two thirds of pension fund money is invested in the stock market, that has paid not net return over the last decade and dividends rarely sufficient to cover fund manager costs, people have rationally concluded that they are better off putting money in ISAs and other cash based arrangements instead of investing them with fund managers of pension funds.

Third, instinctively people know that this low return is inevitable: there is little real innovation going on in the stock market but there is massive rent seeking behaviour by all who manage it. So fund managers take excessive fees, stocks are churned wholly unnecessarily by funds, excess commissions are paid as a result, and all to align returns with those working for banks. Paying money into a pension has simply been a way to support City bonuses.

And again, instinctively, people know that pension funds are a giant Ponzi scheme – with the markets only remaining as high as they are because month in and month out a wall of money comes in from pension funds for fund managers to play with, loot and fritter away. Of course people have no desire to be a part of that.

It’s not that private sector pensions are bad: the whole private sector pension system is based on a fallacy that saving in the stock market can provide a long term future for all when that is plainly not so in any situation, but is impossible when that system is looted for current private gain.

This is the situation that has to be remedied.

And that’s why I proposed People’s Pensions, with Colin Hines and Alan Simpson, then an MP, back in 2003.

I’d change some of that proposal made then: I’d certainly focus less on ownership of assets and more on bond issues to finance their development now. Colin Hines and I have done that consistently since. So as I said in ‘Making Pensions Work‘:

We recommend that if enforced saving is to be required by the government then that government has a duty to ensure that the funds so saved are invested for the common good.

Pension fund performance over the last decade has a been a history of almost perpetual loss making despite the enormous subsidies that pension fund tax relief has provided to the City of London and stock markets, all of which they have frittered away.

Investment in local authority bonds for local regeneration, or in bonds or shares issued by a new Green Investment Bank and in hypothecated bonds e.g. to provide alternative funding to replace the inefficiently expensive Private Finance Initiative for funding public sector infrastructure projects would have prevented those losses –because all of these would have paid positive returns to pension fund investors. It is for exactly this reason that we recommend that such assets be the basis for any new state pension fund in the future.

The impact of our proposals would be significant. At least £20 billion a year would be released into the UK economy for new investment.

By coincidence this is the total sum Osborne is looking for now from pension funds for infrastructure investment: I suggest it would be available annually.

And I suggest, very strongly, that if any confidence is to be restored in private pensions – especially in the light of the plan to make pension saving much more widespread from 2013 – then funds of the sort I sugest have to be the way forward.

They are simple: they would hold bonds in funds invested in the region in which a person lives.

They would be transparent: a person could see what was being done with their money. The current rate of return would be obvious. The basis on which a future return would be paid would be equally clear.

They are risk free - because they’re state backed.

The charges would be tiny – the structure guarantees it.

As a result unlike existing pension funds they would pay a real rate of return.

And that return would be now in the communities in which people live, now in work for those communities and in the future when the next genration pays the retired generation for the capital they had bequeathed to them in exchange for which they give up part of their current income to look after those in retirement. This reflects the fundamental pension contrat which almost all private schemes ignore right now. As I say in the Courageous State:

The fundamental inter-generational pension contract that should exist within any society is that one generation, the older one, will through their own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for the subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured, any pension system will fail.

The pension scheme I suggest reflects this.

But more than that it creates work, it funds what society nees, it’s guaranteed and it’s attractive and it cuts the exploitation of the City out of the pension loop.

That’s why we need it now.

Not compulsorily – but for all who want it.

A Courageous government would offer it. Now.

People’s Pensions – the way to fund infrastructure spending and eliminate PFI

Economics, Pensions 13 Responses »

Dec 012011

Martin Wolf stated something obvious in yesterday’s FT. I’ve made the same point, but he made it in his own direct style that is now so effective:

Instead of such action, we get the gimmicks characteristic of all chancellors under stress. I am strongly in favour of additional spending on infrastructure. But it must be evident, even to the Treasury, that if the government borrows from pension funds to fund infrastructure, the impact on national balance sheets will be exactly the same as if the latter fund the same infrastructure directly, as is now proposed – except that the infrastructure will cost more. This is another in a line of wheezes to get round self-inflicted constraints, themselves partly reflecting ludicrous public sector accounting practices.

What we need – as I’ve argued for almost a decade -are pension funds set up to fund infrastructure spending in the UK. I put the case in People’s Pensions in 2003 and I don’t think it’s changed since:

People’s Pension will be backed by People’s Pension Funds. These entirely new funds will be created to provide a way in which pension contributions can be invested in the building of new public infrastructure projects such as:

• schools and universities

• hospitals and other health facilities

• transport systems (including railways, trams and bus networks)

• social housing

• sustainable energy systems

It is not possible for pension contributions to be specifically directed in this way at present. Instead the £750 billion in UK pensions funds at present are invested in (with the proportion in each shown in brackets):

1. shares issued by private companies (71%)

2. commercial land and buildings (6%)

3. cash and bank accounts (3%)

4. UK government bonds (17%)

5. other bonds (3%)

In 1962 51% of total pension fund assets were invested in UK government bonds. In 1993 it was just 7%. The figures for 2002 quoted above reflect a move out of equities as a result of falling share prices. Even so the amount of cash in pension funds used to help public investment in the UK remains very low. This is because:

• government bonds are an investment option usually only selected by pension fund managers for those approaching retirement

• those with a choice as to where their funds are invested are usually advised against investing in government bonds on the grounds that they are “too safe to provide a useful return”

• people are normally guided towards share based investments. The degree of irrationality in this is detailed below.

The creation of People’s Pension Funds would change this to create an investment model that is:

• sustainable

• secure

• rational, and

• desirable

As a result it would benefit the pension fund, the pensioner and society at large. It will also, from a national perspective, re-balance the availability of investment funds. It has been illogical that the public sector, which generates over 40% of gross domestic product, has not had direct access to pension funds, the largest source of savings cash in the UK.

But I didn’t argue then, and along with Wolf I don’t argue now for such funds to invest directly in the infrastructure and then let it to the government. I argued that it was up to the government to manage and run such projects and issue a bond to the pension fund to represent its investment.

And as I (and my co-authors of the time) pointed out:

What a People’s Pension Fund will never do is undertake the work of the sponsoring organisation. So, if a People’s Pension Fund was sponsored by an NHS trust to build hospitals in its area then that is what the People’s Pension Fund would do, and the contributors to the Fund would have the satisfaction of knowing that they had helped build that facility. It would not, however:

1. provide medical services

2. employ medical staff

3. own the supply of the medical services

All these tasks would remain firmly with the NHS. There is no element of privatisation in the proposal that is being made. In fact, if anything the reverse is true. What a People’s Pension Fund would do is demonstrate the support the public have for state provision of public services by investing in that process. And it will involve people in that process as each People’s Pension Fund will be managed democratically by its members on a mutual, not for profit basis.

I’d tweak a few bits now, but not by much. And I’d also suggest that the funds should be regional e.g a fund for East Anglia, or the North West, and so on, or maybe sector linked e.g. health or education, but the point remains: this is a cheap source of funds for the government.

But it’s also something much more than that. The crisis in pensions is not in the state sector.The crisis is in the private sector, and People’s Pension Funds are a way to overcome that crisis too. It’s an issue I’ll turn to in my next blog.

State employees have to now pay for pensions that others get by right

Pensions 31 Responses »

Nov 302011

Today is a day of national strikes by public sector employees over their pension rights.

The average public sector pensioner gets a pension of £5,600 (median).

The average pension of a woman who worked for local authority is £2,600 pa

Basic old age pension is £102 a week or £5,300.

Pension poverty is defined as having less than £178 a week. £9,256 pa.

So in most cases those retiring on only a state pension from the private sector who have paid nothing get almost £4,000 a year in pension credits and other benefits from the state for which they have not paid a penny in contributuion.

But state employees have to pay all their lives for on average something little better.

And you call that a gold plated deal?

How?

The reality is that public sector employees are paying in very many cases for what they could egt anyway without a pension scheme. Those complaining, please note. The subsidy is to the private sector here – paid for by state sector employees.

That’s the reality of what is happening.

All data from http://www.pcs.org.uk/download.cfm?docid=31F34882-8A2E-4BAB-9CF42FA92DFB02CF

People’s Pensions – Osborne borrows the idea

Pensions, Uncategorized 1 Response »

Nov 242011

George Osborne seems partial to borrowing my ideas.

The General Anti-Avoidance Rule is now on the agenda.

Now he’s borrowing from a document Colin Hines, Alan Simpson and I wrote in 2003, called People’s Pensions.

As the FT notes this morning:

George Osborne will next week hang a “for sale” sign over British infrastructure projects worth tens of billions of pounds, as he attempts to tempt UK pension funds, oil-rich Gulf states and other sovereign wealth funds to pay for new roads, railways, housing and other projects.

The chancellor wants to address what officials say is the “ridiculous” situation where Australian and Canadian pension funds are prepared to invest in big UK infrastructure projects, while their British counterparts are often unwilling to do so.

As we wrote in 2003:

People’s Pension will be backed by People’s Pension Funds. These entirely new funds will be created to provide a way in which pension contributions can be invested in the building of new public infrastructure projects such as:

• schools and universities

• hospitals and other health facilities

• transport systems (including railways, trams and bus networks)

• social housing

• sustainable energy systems

Looks like it’s taken them eight years to realise that back then we’d worked out how to solve the problem of PFI, pay for infrastructure and meet pension need all at the same time.

It’s a shame Labour didn’t listen then. We’d not be in the mess they’re in now if they had.

Still, borrow away George. But do, for heaven’s sake, make sure that this is an explicitly marketed option under the new NEST pension arrangement so people can invest their pensions locally. Because that’s what we really need: the chance for people to invest locally for current and long term gain in the UK economy.

There’s more on this here, in my more recent publication ‘Making Pensions Work‘.