The FT ran a story a day or so ago with the headline:
PM accused of overlooking potential UK pension fund investment
To give a taste it began:
David Cameron is overlooking billions of potential investment held by British savers while asking foreign governments to put money into UK infrastructure , according to a major pension fund.
Sir Merrick Cockell, London Pensions Fund Authority deputy chairman, has urged the prime minister to help local government schemes spend money on major building projects.
Why's this important? Because, as the article notes, despite the chronic need for for infrastructure investment in the UK and the fact that local authority pension funds have £178bn of funds under management they have invested just £330 million into UK infrastructure projects, and all of this into second-hand PFI schemes, which in effect means that they have not created a single new asset or job as a consequence.
This is absurd, and I am pleased Sir Merrick Cockell thinks so. Perhaps he should read the pamphlet I co-authored for NEF more than a decade ago now, called 'People's Pensions', or the more recent 'Making Pensions Work' in which I said (referring to the plan for auto-enrolment pensions, but with the observation much more widely applicable):
Lastly 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.
I stand by that observation and believe that pension funds could unlock massive potential in the UK economy. Instead George Osborne wants them to be frittered away. Isn't it obvious which is the wiser choice?
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I would like to see a huge chunk spent on environmentally friendly prefabricated social housing. I will be honest with you Richard I have practically zero knowledge on these matters, but surely it would be a recession proof investment? Perhaps if it came from socially aware/socially responsible groups like trade unions they could agree to charge quite low rents. Surely if you had a nationwide rent of £250-300 per month, even someone who was on minimum wage (which I would like see rise to at least £10 an hour) would have a larger disposable income so the economy would benefit and provide them an opportunity to save. Plus the construction and manufacturing jobs created from prefab building. Plus impact on environment.
I buy that
I think there is a lot of merit in new construction thinking too
I like the idea of this but with caveats.
Pension funds are one of the major forces at work driving down wages and exporting jobs abroad because those who run them are legally obliged to make sure the funds are solvent. Fund managers are always looking to maximise the returns just like other investors and they will do this by transferring where the value is in a company to the fund. This equals low pay, poor conditions and jobs lost to lower wage economies – things that we have found through your excellent blog to be detrimental to the tax take and the to benign intentions of the State.
And don’t get me started on how this is an effective transfer of cash between one generation to another – from working age people to retired people – those who have made it to those who are trying to make it and may now never will (and yes I now there are far too many pensioners in poverty).
If this is to really work, then the rules of investment (where higher returns are expected over shorter periods of time – something that Will Hutton brought to life for me in his book The State We’re In in the 1990’s) have to change. The economist Steve Keen and other have advocated (say) longer locked in investment periods and more reasonable rates of return.
So yes, unlock the pension funds, but make this work for everyone – we must try a more holistic way of doing this because at the moment the present system just enables immense power to be held by the shareholder at everyone elses expense. For example closing down a factory here places a burden on the taxpayer who must now support the income of those who have lost their jobs whilst the private investors / pension funds benefit from the savings.
There’s got to be a better way of soing this. Please!
Interesting thinking
Well I hope so Richard but I wouldn’t say it if wasn’t being discussed by others. I’m not the most original thinker on these topics because my interest is just that – an interest – not an area of work – but I can spot how certain issues link up and impact on each other.
Some help to get pension fund investment into infrastructure, housing and wealth creation in the real economy would not go amiss but some courage is probably a more crucial factor. Not only do we need a courageous state, we need some courageous pension fund trustee boards.
What is there to be courageous about? Well, for one courage to recognise that their “fiduciary duty” does not prevent them from diversifying investments beyond one kind of business model and industrial sector – the financial sector. The fact that pension funds invest their capital via the “asset management” industry means that, whilst there be asset diversification there is very narrow industrial and business model diversity. The search for cashflow is confined to a business model based on asset speculation.
Courage is also required to challenge the dominant obsession with asset (and liability) valuation and to give greater primacy to income & expenditure. Pension funds can model their future cashflows needed to pay out pension benefits so why not focus on how those cashflows can be funded from income? The real task of a pension fund is to generate adequate cashflow income on a continuous, ongoing basis. John Clancy makes this point well in his book “The Secret Wealth Garden”, where he advocates LGPS investment should be directed into the regional economies which finance those pension funds (through taxation, which is the source of the employer contributions).
Where government could help is by reform of the pension regulatory framework and in creating regional investment banks which can act as a conduit for some of the LGPS investment into the regional economies.
Thanks