The rebalancing agenda, Boris Johnson and the politics of pension funds
The Conservative agenda on pension investments is inherently shallow and increasingly moralistic in tone
The UK coalition government has had its eye on pension fund investments for a while. A reorientation of investment practice by pension funds is seen as essential to economic rebalancing; the explicit suggestion is that pension funds are too short-termist in nature and have not sufficiently invested in long-term assets such as infrastructure.
The most obvious problem with this narrative is that it is has far more to do with austerity than rebalancing. Pension funds are being asked to replace the state’s role as a long-term capital investor, and most infrastructure investment by institutional investors is channelled through the Private Finance Initiative (PFI), or PFI-like arrangements.
Yet even this agenda has been pursued only very cautiously. The coalition has not undertaken any significant changes to pensions regulation that might enable funds to invest more in infrastructure. It has largely ignored its own Kay Review of UK Equity Markets and Long-Term Decision Making (a Vince Cable initiative), which criticised investment practice in the City. In fact, the coalition has focused more on establishing the City as an ‘offshore’ centre for asset management through an array of tax changes, rather than on challenging the practices that privilege short-termism in investment decisions.
Above all, the coalition has helped to reinforce conservatism in pension fund investment practice both by promoting highly individualised ‘defined contribution’ (DC) pensions over collective ‘defined benefit’ (DB) funds – and making long-term investments within DC even more difficult by allowing early access to pensions saving for those aged 55 or over.
As I argue in my paper ‘Pension funds and the City in the UK’s contradictory growth spurts’, the government’s overriding approach to reorienting investments within the DB schemes that remain has been one of encouragement rather than substantive support, and there has in fact emerged recently a quite moralistic tone.
This is undoubtedly related to the fact that most remaining DB schemes are located within the public sector (overwhelmingly in local government). It is often seen as a policy failure that only public-sector funds have co-operated with the coalition’s voluntaristic National Infrastructure Plan. Yet the reality is that, even among public-sector funds, interest has been lukewarm – without changes to how pension funds are regulated, valued and protected, risky and uncertain infrastructure investments place members’ savings in jeopardy. Rather than thinking seriously about how to help pension funds protect their members at the same time as supporting the economic recovery, the coalition has started to admonish funds as another example, apparently, of the vested interests of public servants taking precedence over a common good realisable through the free market.
This is an intensification of a long-running attack on public-sector pensions, typified by George Osborne including them, quite absurdly, within the ‘welfare’ category in the personalised tax summary leaflets he intends to post to every citizen. This is despite the fact that the state pension – which really is paid for through tax – will be distinguished from other welfare spending. Public-sector pensions are manifestly not welfare payments; they are funded by the contributions of individual public-sector workers, contributions which, incidentally, help to lower public-sector wage costs.
Mayor of London Boris Johnson’s recent foray into pensions policy, in a column for The Telegraph, typifies this sentiment. In advocating that the UK’s public-sector pension funds (which he numbers at 39,000) should be amalgamated into a single Citizens’ Wealth Fund, Johnson argues that the problem with pension fund investment practice is that fund operations are interwoven with state bureaucracy:
It is a classic feature of a civilisation in decline that it is afflicted by an unstoppable growth in non-jobs and sinecures, funded by the state and which no one has the guts to curtail. It is the task of Tories to do the curtailing.
What is the obstacle to this plan [i.e. Citizens’ Wealth Fund]? It is the vested interests, of course. For decades now, the public-sector pension fund has been the place where you stick old Doobury, the good egg who is coming up for retirement, the soon-to-be-ex-employee who is looking for another string to his bow.
The column contains several mistakes and falsehoods. Firstly, and most importantly, Johnson’s calculation that there are 39,000 schemes is mind-bogglingly ignorant. Quite apart from the number itself being conjured from thin air, the fact that there are many schemes does not mean that there are many funds. Even if there were 39,000 schemes, the biggest of them don’t have funds at all – because it is much more efficient, and therefore fairer for taxpayers, for them to be organised through the state’s balance-sheet, rather than invested in inefficient capital markets.
Secondly, he claims erroneously that every university has a pension fund. Universities are not part of the public sector, certainly not from a pensions perspective; irrespective of this, they have a single pension fund, the Universities Superannuation Scheme.
Thirdly, he implies that Canada and the Netherlands have used public-sector pensions to create sovereign wealth funds along the lines of the model he advocates. In fact, their ability to invest in large infrastructure projects is due to the vast scale of Canadian and Dutch pension schemes. The UK’s public-sector funds would be similarly vast if they actually were funds – but, as I noted above, they would also be a lot more wasteful. The UK approach better enables the state to invest in infrastructure.
Strangely, however, Johnson actually neglects to rehearse the argument that larger-scale funds are more efficient investors, concentrating instead on the potential administrative efficiency. However, his claims in this regard are really quite spurious. He argues, for instance, that every public-sector pension scheme has its own trustees, managers and accountants; in practice, only in the very largest schemes would any of these positions represent a full-time job. He neglects to mention, of course, that the coalition government has itself introduced more of these so-called ‘non-jobs and sinecures’ by insisting that unfunded schemes operate more like funded schemes, despite the absence of a fund.
This turn to moralism surely reflects the desperation of a government which knows that its failure genuinely to reform the UK’s pre-crisis growth model – because of its own vested interests – will sooner or later backfire. It offers little more than a new twist upon the coalition’s determination to designate the crisis as one of debt, rather than growth.
This last point actually provides a fascinating footnote to this frustrating tale: if UK pension funds ever did significantly reorient their investment practices towards the long term, they would probably be buying many fewer government bonds. That would make life very difficult for a government whose economic strategy is utterly dependent (not that they like to admit it!) on borrowing to compensate for a flailing recovery.
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