This article first appeared in Professional Pensions , a little edited and under the title “state goals won’t override my duty. This is the unexpurgated version published the day after the Prime Minister outlined his vision for Britain at his party conference.
The Prime Minister, Boris Johnson, and Chancellor, Rishi Sunak recently issued a challenge to UK institutional investors, calling for us “To seize this moment, we need an Investment Big Bang, to unlock the hundreds of billions of pounds sitting in UK institutional investors and use it to drive the UK’s recovery.”
They seem to have noticed that the ONS estimated UK private pensions wealth, in March 2018, at £6.1 trillion of a wealth total of £14.63 trillion, greater even than property. However, what they don’t seem to have noticed is that it is already invested. So, the first question: who is going to buy the assets these institutional investors would need to sell?
As is to be expected, there is the not-so-veiled threat in the challenge letter: “The Government is doing everything possible – short of mandating more investment in these areas as some have advocated – …” If nothing else, these politicians understand the electoral consequences of that putative action.
The explicit challenge is:
“Whether you are a trustee or manager of a DC or DB pension fund, running an insurance company or advising investors on their investment strategy, we are challenging you this summer to begin to invest more in long-term UK assets, giving pension savers access to better returns (emphasis added) and enabling them to see their funds support an innovative, healthier, greener future for their country.”
Of course, seeing an innovative, healthier, greener future is irrelevant to the discharge of my fiduciary duties. So, the second question: if these investments are going to yield such attractive outcomes, surely, we should finance them with gilts and reap the rewards as a nation? A subsidiary and trivial question: when will you publish the analysis supporting this better returns assertion?
The Pensions Regulator has relaxed its 20% quota for illiquid investments to accommodate this agenda. It is notable, though, that they have not scrapped their proposed DB funding code with its objective of low dependency on the corporate sponsor, run-off and wind-up.
They seem not to have noticed one of the principal effects of quantitative easing had been to lower the price of liquidity to record lows levels – one consequence of which has been that the investment banks now maintain far lower inventories of debt securities than previously. Buying long-dated debt securities at today’s inflated prices will prove extremely costly should normal times return to those fool enough to do it.
There are other worrying statements, such as:
“We are reviewing the prudential regulatory regime for the insurance sector (Solvency II), …”
Playing fast and loose with insurance security is not a good idea. It is bad enough that increased issuance of long-dated illiquid securities will permit even more ‘matching adjustment’ magical accounting and capitalisation.
I am afraid that Boris Johnson’s statements (lies) about the economic consequences of Brexit leave me unable to trust his word or even adherence to treaty obligations. Good faith has been replaced by the politically expedient. The challenge contains the now compulsory reference to “levelling-up”, but I attended Boris Johnson’s much-trailed “important” speech in Coventry on that. It was devoid of any substance, an empty catch-phrase – the sole idea that local authorities are to be given greater responsibility but no funding for fear of “loony left” councils.
And then there is the small matter of index-linked gilts, where government has or will be unilaterally change the basis of indexation to my material disadvantage.
“Our Ministers and officials will be in touch during the coming weeks … to invite those institutional investors who are willing to make specific commitments to invest more (emphasis added) in Britain’s long-term growth to join us at an Investment Summit in Downing Street in October.”
Welcome to the corridors of corruption.
My response to this challenge is to decline. I will continue to exercise my fiduciary duty seeking the best investments for my scheme membership wherever they may arise. And of course, I will not and cannot in the exercise of those obligations buy “green gilts” at a premium to conventionals.