I have this letter in the FT this morning:
You report that Boris Johnson is making an appeal to the Saudis to invest more in UK renewable energy generation (“Boris Johnson to push for Saudi green energy funding in Riyadh visit”, Report, March 16).
Leaving aside the folly of moving from dependence upon one autocratic energy producer to another of similar ilk, this appeal is wholly unnecessary.
According to the UK Office for National Statistics, households in the UK currently enjoy about £8.4tn of financial wealth, of which the vast majority is invested in either pension funds or ISA accounts. In fact, I estimate that 82 per cent of all current UK non-physical wealth is saved or invested in tax incentivised assets.
In that case, the source of the new funding that Johnson is seeking should be obvious. If all ISA savings were required to be in bonds, backed by a government guarantee, intended to fund the green transition, and if one-quarter of all new pension fund contributions were required to be invested in assets intended to deliver that same transition in exchange for the tax relief on the contributions made, then more than £100bn a year would likely be found to fund this activity, and all as a result of some simple legislative changes.
As Martin Wolf (“Russia's war will remake the world”, Opinion) suggested on March 16, the war that Russia has started will change everything in our economy.
One thing it should do is make us ask how we can use our domestically owned capital for our mutual benefit.
Redirecting it towards investment in tackling climate change by changing the tax incentives for doing so is a very obvious way to achieve that goal.
Richard Murphy
Professor of Accounting Practice Sheffield University Management School
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Well said and well done.
Tax, incentives, climate change. Bill Nordhaus and a CO2 tax spring to mind.
As a private client financial adviser, mainly in the pensions area, I have to agree. To be fair, there has been a big increase in investment in this sector through certain product providers (step forward, Royal London, for instance) and/or SIPPs. You point about a big recession coming is true, too, I fear. I am already seeing people wanting to activate their pension pots earlier than expected to help cope with the increased cost of living. There is a massive retirement income problem emerging, driven by our poor demographics and low levels of saving generally, and I think the next few years will be very difficult.
I agree with that analysis
Sorry, I am off at a tangent but there is an issue that is too quickly being lost; buried by government and its complacent media. Two days ago ‘The Times’ reported the following: “Boris Johnson was at a Conservative Party fundraising dinner attended by at least one donor with links to Russia on the night Vladimir Putin launched his war in Ukraine.” He went to this event in spite of being aware a Russian invasion of Ukraine was imminent, and in spite of: “allegedly telling guests he had to leave early to deal with the crisis.”
After the invasion the Government was still slow to react to the oligarch problem; that is unarguable. It wallowed in legal red-tape and only slowly tackled the extensive oligarch grip on our society, but noticably in piecemeal fashion.
The Britiah electorate is entitled to demand and expect a full, independent, judicially-led invesigation into just how far the Conservative Party had become the creature of oligarchs over the last twenty-five years. To use an expression much beloved by dyed-in-the-wool Conservative supporters over recent years; if the Conservative Party has nothing to hide, it has nothing to fear.
Good letter. I did respond to some of the BTL comments but under my pseudonym (which harks back to days when I cared what my bosses might do if I expressed heresy).
On a related note, why is it that the government always trumpets foreign investment into the UK? If the investment is sound, why not use domestic capital – there IS enough of it as you rightly identify. The implication is that we have gulled hapless foreigners into bad investments…. but the truth is it is the other way round – we have gulled into allowing those with little interest in our wellbeing to have control over important assets.
I guess tit is because foreign investment is trumpeted as a “vote of confidence in UK plc” – are we really that insecure and needy to require this affirmation??
Yes, in a word
And using our capital productively would take it out of the City and that will never do
“I guess tit is because foreign investment is trumpeted as a “vote of confidence in UK plc”
No, I think it is much more a matter quite specifically; providing the City with a specially custom-designed vote of confidence. The City is merely a conduit through which international money flows everywhere; but sufficient sticks to the sides on the way though to oil the wheels of the City (if little else). Allowing foreign investment to feast cheaply on the carcass of British industry provides public reasurrance to foreign investors that, no matter what the cost to everyone else in Britain, have no fear, the City is always open to foreign business above all, whomsoever it is, from wheresoever it comes. That is the real meaning of the Conservative mantra “Britain is open for business”.
Remember the Remembrancer, who sits unelected in the seat of Soverign power; no mere decoration, but the mark of authority.
Indeed….
“On a related note, why is it that the government always trumpets foreign investment into the UK? ”
Maybe because, the flows of “investment” into the Uk (which can be used to either build something new or buy what is left of the family silver) is one way to make the trade deficit not look quite so utterly awful. All that Russian money flowing in helped on that account. So will the privatisation of the NHS.
The tories have no interest in the Uk pulling itself up by its bootstraps – they much prefers outside investors – who usually turn into donors/bribe givers to the tories.
Sorry for the length of what follows – I have tried to make my point as briefly as possible.
I think the proposal to use tax incentives to direct pension funds towards investment in the green transition is a pragmatic approach within the existing paradigm which has shaped our pension system for many years. However there are several dysfunctional behaviours which are derived from the existing system design which also need to be addressed – in particular short termism and allocation of funds for financial speculation rather than providing capital to support productive capacity. Without a paradigm shift even the financing of a green transition will be dogged by the search for maximisation of returns and satisfaction with productive capacity being transferred into foreign ownership and control.
The Ukraine situation should be a sharp lesson of the consequences of a failure to protect national security in essentials such as energy and food supply as well as excess reliance on supply of critical manufactures by importing instead of domestic production. The weakness in national energy and food security and the extensive penetration of the UK economy by overseas ownership can be traced to the financialisation of our economy in which our pension funds have played a fundamental part.
All this comes from the design characteristics. Once popular DB pension schemes are now virtually extinct except in the public sector but there are signs even these state sponsored schemes are running into crisis. The DB problem is derived from the fragmentation of the pension system with hundreds of separate, employer sponsored schemes. All these schemes suffer the same problem; whilst at the early stages the function as pay-as-you-go schemes, where annual pension benefits are covered by annual pension contributions income, as time goes by the number of “active” member (those still employed and contributing) becomes overwhelmed by the numbers of “deferred” members (those who have left the scheme when they change jobs) and the numbers of pensioner members (who have retired). The reduction in the ratio of active members to deferred/pensioner members makes the fund increasingly reliant on investment returns in order to meet pension benefit liabilities.
All DB funds are caught in the following cycle:
Early years – function largely as a PAYG pension scheme with an investment fund attached
As the active/pensioner ratio falls the first stage is to reduce pension benefits and change scheme rules
The next phase is closure of the DB scheme to new members
Followed fairly soon by closure altogether. At this point there are zero active members. The only members left are all deferred members pending their retirement and a growing number of pensioners. The sponsoring employer still faces obligations to plug any pension fund deficits so…
The final stage is “de-risking” and transfer of the remaining assets and liabilities to a pension insurer.
This cycle of long term decline in the DB fund active/pensioner ratio drives the investment fund into a search for maximisation of returns in order to maximise the value of assets, cover the long term liabilities to pay pension benefits and minimise any fund deficits which the employer is obliged to plug.
During this cycle more and more workers are excluded from DB pension schemes and moved into defined contribution (DC) schemes. DC schemes too seek to maximise returns in order to build the biggest “pension pot” for each member.
Short term investment behaviour drives the system to “sell to the highest bidder” – the long term consequences for the national economy are not a concern. Fiduciary duty demands that the funds “act in the best financial interests of the beneficiaries”.
The current scandal at P&O Ferries is a good example of the longer term consequences of UK pension funds complicity in the sale of a long standing UK company to a foreign owner – and not just the ferries but the ports too. When P&O was sold the price paid was 70% over the value of the company.
In his book “Having Their Cake” (2005) Don Young describes how pension funds and City investment firms destroyed a long standing and highly successful UK company – Redland PLC.
This paradigm can be changed by creating a single national pension fund. Such a fund would avoid the demographic time bomb which afflicts individual company DB pension funds. The nation’s demographics do change over time but a scenario where pensioners outnumber active workers will never arise. A NPF would enjoy demographic stability which means it could be managed primarily as a PAYG scheme where annual contributions cover the cost of benefits in most years and has a buffer fund attached to it.
The investment of that buffer fund would not need to be driven by maximisation of returns but would be sustainable on the basis of “adequate returns” and in the process this would reduce the cost of capital to our businesses.
A NPF could create the conditions for the financing of a productive, domestically owned economy and a green transition whilst also allowing us to restore earnings related (DB) pensions for every citizen and bring to an end the scandal of pensioner poverty once and for all.
Thanks Jim
Noted
I’m in the Local Government Pension Scheme, like the NHS & presumably other Government schemes we can buy ‘extra pension’
Why not open this to all so you can buy a small pension, index linked and state backed, what is there not to like about it. The only losers would be the fund managers.
I would suggest that if small pension plans were transferred into this scheme, rather than cash the fund managers hand over the shares the fund holds to jump start a sovereign wealth fund.
So long as it is not like the USS
The USS currently has 476,000 members; 204,000 active members, 194,000 deferred members and 78000 pensioner members. Annual contributions (2020) were £2.8bn and pension benefits cost £2.2bn. USS is still functioning as a PAYG pension scheme but nevertheless is declared to have a massive deficit. The ongoing dispute was prompted when an initial demand for total employer/employee pension contributions of 56% of pay was proposed.
Now, if USS members were part of a national pension fund the annual contribution level would be much lower.
The basic way to work it out is to multiply the level of full pension entitlement as a % of pay by the “dependency ratio” (pensions/actives ratio). If the national P/A ratio is 1/3 (i.e. 3 workers to every pensioner) and the full pension is set at 50% of pay then the contribution rate would e 1/3 x 50% = 1/6 (16.6%). If full pension was set at 60% of pay then the PAYG contribution rate would be 1/3 x 3/5 = 3/15 = 20%.
This is sustainable in a NPF set up because the P/A ratio is stable (although it does change over time it does so SLOWLY and PREDICTABLY) at national level whereas in the USS (and any other separate scheme) the P/A ratio is not stable because pensioner numbers grow over time relative to active members.
The difference between a national pension fund and an SWF is that a NPF would be owned by its members (all citizens of working age and pension members) whereas an SWF is owned by the state