2023 was the year when the cost of living crisis spread from food banks to middle class bank accounts.
Speaking to the FT, Bestinvest managing director Jason Hollands said:
“People ultimately invest to achieve real world goals, including paying off mortgages where they expect to see a significant increase in remortgaging costs. “It’s not surprising that in the current environment, some clients are drawing down on their investments to pay bills or reduce debts given the pincer-like squeeze on household finances from rising prices and higher borrowing costs.”
It might even be called a P/L crisis, with affluent people seeing monthly income being outstripped by housing costs. Fixed rate mortgages leave the safe harbour and find choppier waters. Higher borrowing costs are passed on to renters who find their standard of living dominated by where they live.
Whether the “real world goal” is to live “debt-free” or just to pay the rent/mortgage, 2023 felt like a year when people felt their finances under strain and this is already feeding through to long-term saving plans and pensions.
Not a year to increase pension saving
Although legislation has been passed to allow auto-enrolment rates to increase in line with the “2017 reforms”, there has been no sign from Government that it wishes to enact the actual increases. The Government still has some years in its “mid-decade” window to fulfil its promise and while savings companies would sooner “middle”, meant 2024, I suspect it will mean 2026 at the earliest.
Instead of stressing the need to save more, the Government has turned to “save better” , promising to increase people’s retirement income by £1,000 per year by adopting better investment strategies that create productive finance to drive the economy, improve wages and reduce taxes. “Making more with what we have”, has been the unsaid motto of 2023.
A year to improve the VFM of savings
A common theme of the Mansion House reforms, the defining statement of Government economic intent of the decade so far, was improving the value we get for our money.
Although discussing the measurement of VFM took up a lot of our lives , the impact of the VFM debate will not be a better measure for consumers but a better stick with which regulators can beat non-performing savings managers around the head. VFM is now a covert power of the Pensions Regulator and the FCA, potentially as impactful as consumer duty.
I think the Government missed a trick in VFM (1) in not creating metrics that could be picked up by consumers to allow them to properly measure how their savings are doing. The metrics we have pioneered have been acknowledged but not taken up. The Government are using instead complicated matrices which may be intelligible to experts, but do little to excite consumers. We are a long way from the consumerism of Australia , where the boot really is on the consumer’s foot. We will have to wait for that.
A year of getting things “done for us”
The Mansion House reforms and attendant consultations are not about empowerment but about getting pensions done for us. CDC, Superfunds, productive finance and better governance are means of moving pensions on from the previous mantra of “self-sufficiency and buy-out” to “shared outcomes and run-on”.
The “gold standard” has been nudged away from the absolute certainty of the Government gilt guarantee to the optimised outcome of a properly invested pension fund.
This has left large parts of the policy and regulatory departments of Government wrong-footed. The PRA and BOE have been particularly anxious about a shift away from insurance guarantees towards a reliance on investment growth with the increasingly strong safety net of the PPF. Superfunds and CDC are most definitely not their policies.
As for “productive finance”, the ongoing demise of UK listed markets shows how far we are behind our European and global competitors. When our burgeoning tech sector wants money to fulfil its ambitious plans it turns to European bourses and particularly to the American stock market and private equity giants for funding.
The Government is loathe to intervene – for obvious reasons – but it now faces a new problem, not just are UK equity holdings in pension schemes down to 4% but retail holdings in UK equities are also falling like a stone.
Traditional sources of UK public finance for private companies were to be found from the investment trust sector that dominated the FTSE 250. Today, the talk is all of funds – especially LTAFs, but while fund platforms prosper, tumbleweed now decks the halls of the London Stock Exchange. Investment trusts languish, ensnared in red tape, much of it a legacy of MIFID and PRIIPS.
The LTAFs have not been popular , either with retail or institutional investors. They have distracted us from the underlying malaise – a lack of confidence in investing in the UK.
The neglect of investment trusts and the promotion of LTAFs is proving to have been another false start, another attempt to give savings to insurance platforms and to empower the consumer. But the consumer is disenchanted.
Our stock markets are now suffering from retail disinvestment. Private wealth is now following pension funds who pulled out some time ago
British retail investors had sold down £11.9bn worth of shares in London-listed companies by the end of October, according to the latest data from the Investment Association, just short of the £12bn in the whole of 2022, which was the largest outflow in 20 years.
Whether it be public or private equity, Britain is no longer seen as the place to raise money by companies or to invest money by individuals. This represents a serious loss of confidence on both sides of the equation and the Government and its regulators must be held responsible. Entrepreneurs tell us that it is not that they aren’t doing great things, it’s just that they can’t get the capital to do more, within the UK.
Consequently , UK markets stagnate. The FTSE 100 index is up just 2.1 per cent since the start of the year, while the S&P 500 in the US was up 25 per cent by midday on December 28.
If , as analysts are saying, the loss of confidence in UK markets is now a retail as well as an institutional phenomenon, then the high levels of investment in UK stocks held by individuals are likely to fall still further. Many affluent people hold shares in UK quoted companies because they are senior and work close to or at head office – which have historically been in the UK. Selling off shareholdings acquired through share save schemes is tough, many of these shares are probably under-valued, but when it comes to swapping debt for equity, why wouldn’t you exchange under-performing equities for increasingly expensive debt?
Restoring confidence starts with pensions
I have no doubt that we will look back at 2023 and see it as a fulcrum year where all political parties recognised that something had to be done about the financing of UK companies. Pension money is the low-hanging fruit that can be picked and re-purposed relatively quickly. Retail investment may take longer to come back, just as it took longer to leave our shores.
What actually happens in 2024 matters. The long-running turf war between the Treasury and the DWP now seems to be over and peace has broken out within the policy teams. But there is still much to do to turn regulators away from long-held beliefs that have been established in DB pension funding codes and in Insurance Solvency regulation.
Challenging these beliefs was the stuff of 2023, getting beyond them will be harder.
