Why governments should not direct pension investment

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by Shaun Richards

Yesterday brought an intriguing joint statement from the UK Prime Minister Boris Johnson and Chancellor of the Exchequer Rishi Sunak. This morning it has been published as an open letter so let us take a look.

The United Kingdom’s economy possesses a rich pool of assets ripe for long-term investment and bolstered by a world-leading research sector, commitment to the green technologies of the future, and British entrepreneurial
spirit.

They are going to invest in these areas? There would be some sense in a plan to take advantage of the low borrowing rates for the UK government that we looked at only yesterday. With the UK 50- year bond yield at a mere 0.74% even allowing for costs above that there is a low bar that investments need to beat.

But they are unlikely to be challenging themselves and move onto suggesting that others change their behaviour.

Currently global investors, including pension funds from Canada and Australia, are benefitting from the opportunities that UK long term investments afford,
while UK institutional investors are under-represented in owning UK assets.

There are all sorts of issues here and the first is being lectured about the long-term from people who often cannot see beyond the end of that day. Next is that with the UK as an open economy we want foreign investment although now we seem to want to replace it with our own. Then there is the issue of who defines “under-represented”?

It gets worse quite quickly.

For example, over eighty per cent of UK defined contribution pension funds’ investments are in mostly listed securities, which represent only twenty percent of the UK’s assets.

Maybe their lives in the public sector with taxpayer guaranteed pensions have made them forget that those who have a defined contribution pension choose where to invest their money. Also a critique of “mostly listed” seems to forget that it provides protection against the sort of thing that happened to Woodford Funds which invested as requested but found itself in illiquid investments that had no exit when things went wrong. Remember this from December 2019?

Investors in funds holding hard-to-trade assets could be denied immediate access to their cash, or forced to take a discount on withdrawals, in plans drawn up by the Bank of England to tackle the liquidity mismatch in open-ended funds.  ( CityWire)

So not only are you going to be told where to invest access to withdrawals will be restricted to as a result of both the Woodford collapse and the closure of property funds.

The warning comes while investors remain trapped in the Woodford Equity Income fund, which is set to wind up after its suspension in June. Manager Neil Woodford was unable to sell the fund’s assets, which included heavy positions in hard-to-trade unquoted and smaller companies, quickly enough to meet mounting withdrawal requests. ( CityWire)

There are differences in that Neil Woodford invested in smaller companies rather than the larger schemes now being promoted. But a lot more similarities. For example these will be illiquid and may be hard to trade so if it goes wrong you will be trapped in it. Such things get worse if we look at the latest news from the Financial Conduct Authority on the case.

Subject to that as well as an opinion
from expert witnesses, we are confident the investigation work will be completed by the end
of this year.

That was from this May. So if things go wrong any investigation will be at a snail’s pace. Effectively the careers of the regulators who were asleep at the wheel will be allowed to continue and indeed thrive as of course Andrew Bailey is now Governor of the Bank of England. Investors will not only lack closure but fees will be eating away at what little is left.

Hot Air

There is no shortage of this.

This Government is determined to Build Back Better, uniting and levelling up the country. By delivering our Ten Point Plan for a Green Industrial Revolution we
will support up to 250,000 jobs, while also being the first generation to leave the natural environment in a better condition than we found it.

Actually loads of generations probably did and the “up to” reminds me of all the promises of house building at Ebbsfleet across different governments. I think something was built eventually. Then there is the “green” issue. People have different views about it but let me show you something practical from UK Grid yesterday.

GB Grid: #Wind is generating 0.66GW (2.07%) out of 31.65GW

The hype is a maximum capacity of 20 GW although it never gets anywhere near that and the peaks I have seen are around 13 GW. But it has had a woeful spring and summer this year. I have written before that we need some form of storage to get us through the peaks and troughs but the truth is that this has been too much for that. So our investors may not only be getting not much but have the double-whammy of doing so in the dark.

How do they invest?

HS2

This is supposed to be a grand project to take high speed railways to the North of England and to Scotland. But as the cost has soared to over £100 billion the delivery is shrinking.

The Eastern leg of the HS2 rail line to Nottingham, Sheffield and Leeds has been ‘shelved’ amid concerns about soaring costs. ( @PoliticsForAll)

Yet according to Professor Stephen Gleinster it gets ever more expensive.

The £180bn cost of HS2 and associated rail schemes in the north of England is in the context of spending
on infrastructure in general and the overall national finances.

But what is the purpose?

What problem is HS2 intended to solve? HS2 has been variously promoted as a means: to save time; to increase rail capacity; to generate wider economic impacts; to create jobs; to reduce carbon emissions; to improve connectivity; to bridge the north–south divide; and to level up. In terms of quantified evidence, time savings dominate the benefits.

Imagine investing in that? You would end up like those who invested in Eurotunnel and in case any readers did I will not point it out and simply let you figure out what must have taken place.

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Comment

This is in another form a part of the control agenda where they want to control ever more. There is nothing new in that which is part of the problem because of we look back at what they have suggested there have been some spectacular failures. Indeed so bad that there would have been a miss selling enquiry if it had been suggested by anyone else.

An obvious issue is the mismatch in time scales where a group of politicians with a time span if we are generous of this week tell people what to do with investments lasting decades. So they will be long gone should anything go wrong which on the current plans is rather likely. One problem I have highlighted is a success for investors which is wind farms where they are guaranteed such a high electricity price they almost have to make money. But at this point UK investors lose out as both taxpayers and consumers.

Also having butchered annuity returns do they have the same plan for investment returns? It is hard not to be reminded that they usually benefit from taxpayer guaranteed pensions.

Let me finish with one of my points from earlier. It was only a couple of years ago that we were told illiquid investments were a problem.

We recognise the responsibility of the Government to remove obstacles and costs to making long-term, illiquid investments in the UK.

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