Finance for the Future’s report ‘Making 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.
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Would the requirement that “at least one quarter of the funds subscribed should be invested in new economic activity in the UK”, be legitimate under EU law?
Is it really sensible to mandate that a significant proportion of a person’s pension fund be invested in, in effect, venture capital schemes? Do we need yet more regulation and government monitoring that will be needed to enforce this? Why does your stated -2% return figure on shares ignore dividends, an often +2%, +3% or more annually? Why do you glibly discount the possibility that such an upheaval in schemes is likely to simply turn off even more folk from saving for retirement? Why am I left feeling this is a completely impractical and damaging idea?
It is an interesting suggestion, but seems fairly clearly to be a restriction on the movement of capital within the EEA and therefore unlawful. It might also be considered unlawful state aid (although this is a question outside my expertise).
The easy fix would of course be to recast the proposal to apply to all new economic activity in the EEA, but I can see this is politically less attractive.
That said, there is clearly much that can be done in the sphere of pension fund transparency. How about requiring pension funds to consult their members before (eg) they approve executive pay? The principal-agent problem bedevils all fund management.
@Marc Daniels
Many tax incentives in the UK have been predicated on investment in UK operations
Has Lisbon banned them all?
@Dave Wilson
I think people will be delighted to find they can save with a much better return and not in the stock market
People hate the City
Haven’t you noticed?
@Marc Daniels
Other comments noted
Actually EEA would not be a problem – but people would not choose to do it as it would not be saleable
Investment in the UK is
Richard, it’s nothing to do with Lisbon – just the basic freedom of establishment in the EC Treaty. There has been a steady march of ECJ caselaw making clear that statutory benefits/exemptions/requirements limited to particular member states are unlawful in all but very limited cases. HMRC has been essentially reactive on this, and generally the UK tax legislation has only changed where there have been specific legal challenges.
For what it’s worth, I think the ECJ’s extension of EU law into tax – which was always supposed to be reserved to the Member States – is an outrageous power grab. But that particular genie is now well out of the bottle and, unless there is a radical amendment to the Treaty, one should assume that domestic law cannot discriminate between UK and EEA. This is a particular problem when some EEA states essentially act as tax havens, as EU law can be used as a bridge between the UK and those tax havens.
@Marc Daniels
Well we’ve been breaching it then for a long time
It’s been a gradual process of realisation, but at each stage – thin cap, CFC rules, group relief, loan relationship rules, relief for charitable giving, etc UK legislation has had to become non-discriminatory. I’m afraid it makes your proposal a non-starter in its current form – if you doubt this, speak to any lawyer with experience in this area (and this is something I’d recommend before formulating any pensions or tax proposal).
@Marc Daniels
I know you’re a lawyer
And I’m not for good reason – I’m interested in solutions, not obstacles
And I don’t see your obstacles – candidly, and as someone who knows something about these things
You are clearly out of your depth on the matter of EU law, Richard. You should have least consulted with someone in this field before formulating a complete package that won’t stand up. How embarrassing for you.
@Tom Howe
What a silly chap you are Tom
a) I considered it
b) If I’m wrong then a lot of UK tax law needs re-0writing
c) If I’m wrong so what? It’s hardly a deal breaker – as I note pensions will be sold on the basis that they will invest in the UK – an option that is entirely legal
d) Do you honestly think I’m embarrassed if an idea I promote needs a minor refinement – if that proves to be necessary? You of course may have never made a mistake but I am i) human ii) honest
If this is the best you can contribute here I may have real problems believing you are contributing to debate though – but that is another issue
Slagging off lawyers is satisfying but not particularly constructive.
UK tax law has by now largely been rewritten in compliance with EU law – this has been the major tax development of the last ten years. Politically I find this deeply unattractive – the cost to the Exchequer is in the £billions, but for whatever reason the issue has never received the attention it deserves.
Perhaps you will be able to find someone suitably qualified who believes your proposal as stated is compatible with EU law; but I am fairly confident you will not, and in that circumstance the sensible thing to do is amend your proposal to apply to EEA investment generally.
@Marc Daniels
Let’s agree to differ
The issue is immaterial – because the reality is the funds could all be invested in the UK
As I suggest