A parallel crisis in UK pensions and capital markets
The subtitle in New Financial’s report: UK capital markets – a new sense of urgency rather gives the game away. This is a report that looks to capitalise on fear to drive money into the palms of its sponsors.
New Financial claims to be a “social enterprise”, but closer inspection suggests that the society in question is pretty exclusive.
At the heart of New Financial is a managed programme of around 30 private dinners, briefings and workshops a year at its premises in Marylebone, at which senior executives from market users and participants can engage with each other in a discreet and neutral environment.
It is in this context that their report on what it wants Government do do, should be read.
What is New Financials’ report suggesting?
The report would have us believe that by increasing auto-enrolment minima from 8% of AE band earnings to 16%, we can slay the twin dragons of insufficient investment capital for UK employers and adequate pensions for their employees.
One of the sponsors of the report is Abrdn, Britain’s least successful fund manager. It has been leaking assets in this “challenging” environment, almost as fast as pension schemes invested in LDI last year. Abrdn’s CEO , Stephen Bird, told the FT that “when rates go from zero to 5 per cent plus, risk assets are harder to sell“. A lot of pension funds are wishing they hadn’t brought LDI products in the first place and are moving on.
So Abrdn is pivoting from its LDI based sales strategy , to one that sells growth, in particular “productive finance”. Having helped take out £500bn of the asset base of DB, it’s time to commission a report that tells us that pension schemes got it all wrong
Over the past few decades, layers of well-intended regulatory reform have created a framework and culture in UK pensions and investment that seems actively designed to eliminate risk and discourage long-term investment.
Now we are told that we have been looking at pension investment through the wrong end of the telescope by some of the people who profited when we did. The lion now wants to be in charge of the sheepfold.
Instead of asking ‘how can we get more money from UK pensions into more productive investment?’ we have reframed the essay question to instead ask ‘how do we enable the
pensions industry to do a better day job of providing a secure and comfortable retirement for millions of people in every corner of the UK?’
Abrdn’s co-sponsor is Bird’s former employer CitiBank – or Citi as they prefer to be known. Whatever you call Citi- it is a bank – a big American bank that like its peers has been busy enabling the wholesale collapse in pension security resulting from LDI. Like Abrdn, it is struggling to get its hands on our money.
Greed
The stench of entitlement is everywhere in this report. I can just hear the murmur of approval as the senior executives relax in New Financial’s Marylebone premises.
If ever a report was designed to give ammunition to those who argue against greater allocations to growth assets, here it is. Whatever the asset management and banking industries are offered, they want more.
We learn from the PLSA’s submission to the DWP on DB options that
The scale and distribution of assets across the pensions sector is expected to alter substantially over the next decade, during which time we expect the volume of assets in DC pension schemes to double to around £1 trillion and the value of assets in the LGPS to increase to around £500 billion. The value of private sector DB pension funds is expected to stay roughly the same as today’s high value (£1.5 trillion).
Is that not enough?
The PLSA numbers assume the already substantial hikes in AE contributions planned for the middle of this decade (well late middle). You would have thought that this is enough but no. The PLSA does not include a further doubling of AE DC flows from 8% to 16% of the band , as proposed by this report.
Nowhere in this report is there any analysis of the role of state pension and benefits, the report assumes that pensions are in crisis because our DC pots are too small to make us self-sufficient. The reality is that for most people of modest means, the state pension and benefits form the largest part of their retirement security. It is not the job of the financial services industry to take over this bed-rock of security for ordinary people. People pay taxes and national insurance for a reason. They should not pay twice to line the pockets of the financial services industry.
And not content with demanding money from the hard-pressed saver (over- dependent on state pensions and under-dependent on the financial services industry), the report goes on to propose that the public sector pension schemes switch to a funded basis
Unfunded public sector schemes: the potential key to unlocking investment at scale in UK productive assets is to convert the huge unfunded public sector pensions schemes such as the NHS and civil service schemes into funded schemes over time. These schemes have over £2 trillion in liabilities (but zero assets) and are already guaranteed by the government. The government could shift them onto its balance sheet, seed them initially with unmarketable gilts, and shift over time to marketable gilts (providing a willing buyer for future UK government debt). At the same time, introduce a staggered shift over 10 years from notional to funded contributions. From our calculations, within 25 years you would have a fund worth more than £2 trillion from contributions alone – and not long after that you could be talking serious money.
This is mad talk! The cost of moving the unfunded pensions to funded over the next 25 years is enough to severely challenge every economic prediction made for this country from IFS to HMT.
For what? For the prospect of financial behemoths regarding the UK as a very attractive source of revenue?
These UK heavyweights jump from one bandwagon to another , commissi0ning a massive 42 page report, 12 of which is folksy whimsy including a section called “fantasy pensions” and the remaining 30 being charts and analysis purporting to support the emasculation of the UK economy and of personal financial well-being.
A price to pay
I knew there would be a price to pay for the exuberance of the Mansion House reforms and this is it. Instead of responsible thinking on value for money and necessary reforms to retirement options, the problem of small pots and reform of trustee duties – we get financial vandalism.
The price we could pay is that the Treasury opens the door to financial hooligans who like “talking serious money” that comes out of the public and private purse.
This unseemly report is the product of an entitled few “senior executives” who consider they can preach from a pulpit granted them by New Financial. We don’t need this report, there were better things that Abrdn and Citi could have done with the money. Consumers always end up paying for such folly and so long as we put up with it, it will continue, so please guys – just stop!
I hope there is at least one reader that would be disappointed if I didn’t reply in respect of the unfunded public sector pension proposals. To add to the debate can I therefore ask –
1. Was the “economy” appreciated as the fund for this £2tn of liability? (Aside; the latest Whole of Government Accounts are only as at April 2020.)
2. Was the reduction in the SCAPE discount rate to CPI+1.7% on 30th March 2023 appreciated?
3. Was the (fudged) extra £8bn pa employer contribution increase from April 2024 also appreciated? (The alternative of increased employee contributions or reduced benefits or later retirement apparently wasn’t considered appropriate. Aside £8bn isn’t far away from 0.5p on the basic rate of income tax.)
4. Did any past service deficit arithmetic get completed around the suggested funded scheme with the March 2023 SCAPE discount rate reduction? (Historically ~CPI+3% pa to CPI+1.7% on £2tn of liabilities ~ £500bn.)
5. What is the difference between marketable and unmarketable gilts? (Neither will produce the required funding return of CPI+1.7% pa for future accrual, let along CPI+3% pa for historic promises.)
6. Did the authors consider these guaranteed DB pensions as a “lifetime (not triple) pension lock”?
7. On the positive side, would such a move increase HMG awareness of the impact of QE, the lack of QT and even prompt LDI considerations?
This was definitely the opening for a riposte on the important issue of unfunded public sector schemes.
We need to be careful we don’t end up hating both LDI and productive investment! We gotta pay the pensions with something?
Of course the first response from this industry is for the public / taxpayer to provide more funding (assets under management is king), and to offer lower returns. This is what can happen when you have an oligopoly and a Regulator which has a mandate aligning it with insurers (ie of the insurers, for insurers) rather than any statutory requirement to promote or increase private sector provision of retirement income.
At the end of the day, this all comes down quite simply as to whether private pensions should be paid :
(a) ostensibly out of future taxation (the consequence of LDI and “de-risking” and the truly colossal transition to gilt funding), or
(b) by reaping the rewards through dividends and growth from investing in a divers portfolio of (global) enterprise and productive finance.
For me the economic and moral arguments would support the later.
Allan Martin’s point on the unfunded public sector points is salient in assessing whether investing in UK Govt gilts can still (for the financial modellers) be consider as zero risk (in the de-risking parlance). 15 year AA corporate bonds were trading with a yield of 5.31% the other day while BoE base rate is 5.25% – so not sure the market still sees UK Govt as risk free?
On a recent blog it was argued that profit was not a bad thing, and so we must accept and encourage debate from thinktanks, even if sponsored by those with a vested interest. We need profits generated from the markets to pay pensions. The moderation against (the greed and fear) of the market makers should come from the Regulators – that should be their actual role; limited the excesses of the powerful over the public. Not in trying to direct the investment decisions of 5000 Pension Schemes. So, lets encourage and hear all of the arguments for growth. There are still plenty of grown ups in the room to ensure the reward for innovation and growth is commensurate and fair.