November 15, 2024 - 11:40am
Britain’s farmers haven’t got much to thank Rachel Reeves for, but at least she didn’t collectivise them. Britain’s pension funds might not be so lucky. In her Mansion House speech last night, the Chancellor set out her intention to consolidate 86 local government pension schemes into eight “megafunds”.
The aim is to create financial institutions with the heft to make major strategic investments in the British economy. Instead of limiting themselves to bog-standard money management, the hope is that they’ll develop the capacity to finance high-potential start-ups and ambitious infrastructure projects.
This megafund model is already established in Canada and Australia — and Reeves’s Tory predecessor, Jeremy Hunt, wanted the same for the UK. Yesterday, he not only welcomed the Reeves scheme, but basically claimed the credit. There is, however, a big difference between his policy and hers. Hunt’s scheme was voluntary; Reeves’s is not. So with the pension pots of 6.5 million people at stake, should we be worried?
In a word: yes. Reeves claims that her pension reforms could free up £80 billion of investment for the British economy. But for that to be true, there needs to be £80 billion of projects waiting for the pension funds to invest in. Through the City of London, the UK is already wide open to investment. What, then, is stopping the global money markets from funding every shovel-ready infrastructure scheme this country has to offer?
Nothing — apart from high taxes, a dysfunctional planning regime and terrible transport networks. All this and much more has crushed British enterprise, which explains why UK growth and productivity are down in the dumps with continental Europe, not soaring to American heights.
So how does Reeves propose to fix an economic model which has been broken since the Global Financial Crisis? She does claim that “supply-side reform is a central part of our work” — but when it comes to specifics, the Government’s programme is unconvincing. Objectives such as “delivering a world-beating sustainable finance framework” and “empowering female entrepreneurs” sound nice, but they won’t shift us from EU to US levels of dynamism.
How do we become a country where desperately needed lab space around cities like Cambridge isn’t held up by the planning process? How do we ensure that regulatory abominations, such as the £100 million bat tunnel along a section of the HS2 route, don’t ever happen again? Or, if we want a new generation of British nuclear power stations, how is the Government going to stop them from being the most expensive nukes in the world?
Last night, Reeves gave us no clue. She did promise to rip up some banking regulations — but what this country needs is to free up the pipeline of construction projects, not to accelerate the flow of money. We’re already capable of financing things; actually building them is less straightforward.
Putting the cart before the horse has always been the Labour way. When he was Chancellor, Gordon Brown pumped taxpayers’ cash into our public services while simultaneously frustrating Tony Blair’s attempts to reform them. The results were predictable — and left our schools and hospitals in a poor state to weather austerity once the economy crashed in 2008. By making much the same mistake, Reeves is setting up the megafunds to become a megaflop.
Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.
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SubscribeThey are not a bad idea in principle, but in what will Rachel Reeves’s pension megafunds be investing?
How about Thames Water, which has just had to secure the approval of its Class A bondholders, the likes of Silver Point and Elliott Partners, for an emergency loan of three billion pounds? Why not? It paid a dividend of £158 million only in July.
If, as indubitably applies to the water companies, something would have to be nationalised rather than ever be allowed to go bust, then it does not belong in the private sector at all.
That’s an interesting heuristic.
£158m is a tiny dividend whether measured by capitalisation, asset base, or return on investment. Even if it was paid only on new loans, it represents only 5% interest on £3bn.
Now, I appreciate Thames Water has been “Glazered” by several different owners. It’s debt pile is the wreckage of a ponzi scheme by successive owners extracting value by debt issuance and sale. But let us not be blind to why this was encouraged. The Treasury’s patsies at the Regulator dictated bills be kept low and dictated a large capital investment programme and the only way to solve this contradiction was ever greater financialisation of the assets, which also helped inflate “inward investment” and keep the City busy.
For her policies to ‘backfire’ one has to have a settled notion of what she conceives success as looking like.
As with destroying small farms and eviscerating private education – neither of which appears to have a defensible economic justification with a Foreign Aid of 7 Billion and the international climate finance budget set at £11.6billion. – the obvious conclusion is that the goal is not economic but rather more abstract. Priorities have been agreed in advance and the money must be found for them, whatever the consequences.
We have arguably reached the point, which Mrs Thatcher envisioned, when the Left (of both parties) has simply run out of other peoples money.
And once again those on he right have simply been naive about what would happen next. Rather than being compelled to reign in their grandiloquent schemes they are going to set about eating the seed corn.
From the ability to feed ourselves and defend ourselves to the capacity to educate our children and fund the care of our elderly.
All are fit to be mortgaged to expediency when the agenda is sufficiently ‘transformational’.
“And worse it may be yet: the worst is not so long as we can say, ‘This is the worst.’”
I hope to god that I’m reading this wrong, but is she actually saying the govt will seize the funds and invest them in projects the govt deems profitable?
Yes. Peoples pensions are going to be flushed away.
You are right in that they will start manipulating the funding choices of the remaining mega-fund managers – but I don’t think the notion of “profitably” for the funds has ever crossed their minds.
eviscerating private education
Actually that’s an even bigger backfire because, as a Treasury accountant has rather belatedly pointed out, schools starting to pay VAT can claim back all the VAT spent on any kind of capital investment – computers, building projects, furniture – for the past ten years. Far from raising money for the Treasury it’s going to cost taxpayers a fortune.
This is unquestionably the dumbest Labour leadership in the party’s history.
The Conservatives, most especially seem to have forgotten that, in the days of yore, and is so often the case in the ” horseshoe” link between the top and bottom of society ( as in the military and farming) in Britain, The City and The Trade Unions had the fraternity of the then biggest equity shareholders and gilt buyers. The Coal Board, Merchant Navy, Miners, and other pension funds were the biggest single shareholders in the largest UK public companies… the rise of lower middle class rule of everything in nu britn, with the clerks and Pooters, devoid of leadership, duty, responsibility, decision making ability and respect now at the helm of what has become a giant ” in tray to out tray” in digital form, is responsible for the implosion of our country.
The simple truth is the 86 varieties of local government pension schemes have a diverse set of trustees. That variety of schemes and diversity of management has kept all trustees honest, diligent, and focused on legal duties to members. Members meanwhile can easily organise to hold trustees to account.
In short, the 86 schemes have proved very difficult to institutionally capture. Reducing the numbers to eight will reduce accountability to members and make it easier to rig elections to get politicised activists elected. Hey presto, having reached the limits of taxation to raise more revenue, the Treasury has a new non-tax source of capital funding.
I have no sympathy. The public sector votes almost as a block for ever more “investment” in public “services”. Now they can use their pensions to “invest” in themselves. How can they quibble?
I quibble.
When this all goes wrong, it’s the ordinary taxpayers (that’s us) who’ll be picking up the tab.
The govenment has no business telling pension funds what they should invest in. Doesn’t matter whether they’re private or public sector funds.
I note that Rachel Reeves sees great opportunities in unlisted private equity investments. As clear a “top of the market” signal as you’re going to get. Reeves, Gordon Brown and co are the “dumb money”.
Yes, I was being glib. Most of the local government pension liabilities are final salary pensions despite the final salary schemes being closed to new members. If these public schemes go into deficit the liabilities become the government’s, ours, and the only source of new money is an already squeezed private sector. The financial future is fantastically awful for the UK.
With 86 LGPS schemes you get a bunch of councillors who campaigned on more street lighting and increasing resident parking schemes suddenly in charge of investing in bond, equity and real assets and they don’t know what they are doing.
With pooling you get trained professionals who drive down costs with economies of scale. Whether the UK Govt or Private Sector can come up with suitable investment opportunities that megaffunds and the fund managers they employ to select, there is the challenge.
I don’t think it’s the case that central government says here’s project A, B or C pick 2. Whoever runs the project needs to have a compelling case for investment. And no doubt there will be some grey area in the middle.
When stated objectives include “empowering female entrepreneurs,” this is called social engineering. Besides, what is the cost of ’empowering’ a single demographic anyway? How lovely for Brits that your govt has discovered a new pot of other people’s money to spend with no penalty in case something goes wrong.
Every enterprise from The Post Office to Talk Talk to the Met Police et al gets trashed and broken by a female person at the top. We were all told in the 1970s that if women ran the world everything would run smoothly and sensibly and caringly. But that doesn’t happen. It all goes tits up whatever the enterprise.
I’m beginning to think you may be right.
The Idea that this Govt with zero business experience can invest better than professionals is terrifying.
In 10 years time,no state pension and no works pension.
My initial thought is they will take this money to invest in wind and solar projects – and transmission lines etc – that the private sector has no interest in. If this is the case, it will end very, very badly for British citizens.
A future government will be printing Licences to Beg like in the old days. They should do that now so when an insouciant raggedy man asks you for spare change you can say.Show me your license”. Just to make them have to put a bit of effort in
“empowering female entrepreneurs”
This government really needs to crawl out of the 1980s.
No it won’t. Sometimes Unherd is far too partisan. This is a v sensible, long overdue policy intervention, that the Right is just grumpy and a little embarrassed it never did.
The UK pension system is one of the largest in the world – the Local Government Pension Scheme and Defined Contribution market will manage £1.3 trillion in assets by 2030. Pension funds begin to return much greater productive investment levels once the size of assets they manage reaches between £25-50 billion. At this point they are better placed to invest in a wider range of assets, e.g: new businesses and expensive infrastructure projects. This is supported by evidence from Canada and Australia. Canada’s pension schemes invest around four times more in infrastructure, while Australia pension schemes invest around three times more in infrastructure and 10 times more in private equity, such as businesses, compared to Defined Contribution schemes in the UK.
The UK needs to modernise so much infrastructure. It also needs to stop the continual transfer out of the UK of successful medium size companies because they can’t access investment capital. What is the point of having the City and yet a paucity of investment with our own money in our own infrastructure and businesses.
The legislation will go through in 2025 whilst the Govt pushes ahead with the other planning and banking law changes promised. Painfully for the Right it’s beginning to look like the strategy has coherency. Too much yah-boo knee jerk reaction clouds judgment.
Medium-sized companies leave the U.K. because it’s a sh*t place to grow a large business. Nothing to do with capital availability.
Why would the government not just issue bonds to finance capital spending? Why would utilities not just issue bonds? The reason is that it would appear as debt. But, if the government mandates the use of certain infrastructure through regulation, then the public still pays for it but, magically, it does not appear as government debt.
Unfortunately, the evidence on the performance of medium/large pension funds vs super-large ones is much more equivocal. There is no doubt that some of the Canadian & Australia pension funds have invested more in infrastructure, but with rather mixed results – e.g. HS1, Thames Water, Heathrow, etc. But for the most part they buy into existing companies and don’t fund new projects except via debt-type instruments.
However the real difference is regulation. These pension funds aren’t expected to keep as high a proportion of their assets in safe investments, mostly government bonds. So if this policy were to lead to a significant reallocation from bonds to infrastructure equity, it would significantly increase public borrowing costs – a grand victory for the Treasury.
I am not sure how dumb the Treasury is in this respect. The reality is that lack of funding for private infrastructure is just a sign of financial repression designed to keep public borrowing costs down. All this policy will achieve is to shift the financial deck of cards without changing anything fundamental. All infrastructure finance relies on regulations, laws, etc which compel the public at large to pay the costs.
The general public will still pay via taxes or user charges. It doesn’t matter in aggregate whether wind farms are financed by private investment secured against state guaranteed prices funded by levies (taxes) on users or debt funding the CEGB (in the past) underwritten by the government. If you do the accounting properly, both appear as liabilities on the public balance sheet.
Another cliche: this is just rearranging chairs on the decks of the Titanic.
It’s obvious that Reeves is looking for a new source of debt finance for government spending, just as Brown developed PFI. These funds will not be investing speculatively, or innovatively, like the railway builders. They will be financing government schemes provided they are guaranteed a good risk-adjusted rate of return, like a corporate bond.