A darkling shot of Westminster from the heart of the City
Are we rid of the curse of RBS and its peers?
We have been celebrating the sale of our final shares in RBS (not NatWest). We have been paying the price (in this case £10bn) but more widely, the opportunity to invest in our future. We have swapped investment in our future for a “make do” philosophy where we get by on what we’ve got. We swapped a great world for our kids for austerity for us all.
Austerity for pensions
I didn’t enjoy reading Tej Parikh’s article: “Britain doesn’t have a productivity puzzle”. I read it and fumed over it on Sunday afternoon. I’d been sent it by Hymans Calum Wilson. This morning I’ve been reading comment from my friend John Hamilton. Their view is expressed on page 14-15 of Hymans “pensions untapped” paper.
We are sorry for the 20 years of pension austerity that has turned our pension system from what Field called an “economic miracle” to the bankrupt of 2022.
Pensions became an owner of gilts bought with capital leant by the same banks as forced austerity upon us in the financial crisis. Instead of looking to the future we tried to insure against the past.
My anger was that I could not enjoy my partner singing for the Windsor Ukulele band at a local pub.
Pensions – in love with managing debt not investing for the future
This is what Tej wrote in his analysis of Britain’s 21st century productivity relapse
“UK workers have to make do with a third less capital per hour than their counterparts in higher-productivity peer countries,” says Tera Allas, senior adviser to McKinsey. “This has accumulated from decades of under-investment in equipment, research and development, training and infrastructure, by both the public and private sector.”
While our peer nations have invested in systems that allow commuters to travel to work, we have not. While they invest in power, we pay higher electricity than everyone else, the list of UK deficiencies is so obvious that he wonders why we consider it a “puzzle”. We have stopped investing in the future, the Torsten Bell theme, what this blog has been trying to say (that not so eloquently as Bell).
That’s why Bell lost his temper at the PLSA in Edinburgh and why we are angry. We shouldn’t need mandating to help us sort out what went wrong with productivity, I disagree with friends who don’t want Government intervention . I think we do – because the inertia in pensions is mature and will reassert itself without the gun to the head that Reeves and Bell are pointing. Tej Parikh , in his article, has this to say.
How Capital is allocated also matters. In Britain, pension funds have been shifting money away from UK equities towards bonds for over two decades. This shift has not occurred in other major pension markets. This, alongside broader challenges in finding venture capital, has long sapped domestic companies’ ability to scale.
Tej is right, we are right, Bell and Reeves are right, pensions- as the allocator of capital- has failed. This failure is still being gloried by insurers and consultants and given space in the Times and a range of pensions suckered by a group purporting to be the pension industry (read about it here).
We do not need to rehearse failure, we need to move on Here is Calum Wilson in an email on reading Tej’s article
It was interesting to see the connection to pensions and their reduced allocation to enterprise investments (my area of work). Having read the current Pension Minister’s book on our need to become a nation of investors, I imagine your diagnosis would resonate and recent DB reforms announced last week create the potential for material (£400bn) evolutionary re-investment in productive finance, as we outline on pages 14 and 15 of our paper .. untapped-potential-of-pensions.pdf
This is what a sane and level headed pension industry would do. Here is a comment from another correspondent who differs from me about the gun to the head.
In a well operating free market, capital will seek out and support the opportunities – and in that I have faith in the ingenuity/creativity/need/greed/benevolence and commercial enterprise of people.
But, as is pointed out in the (Times) article, the UK somewhat uniquely has guided its pension scheme to dis-invest over the last 20 years. As once said, it we continue to set our (investment) hopes and aspirations so low, we might make them, just…
It was all just too convenient for all the vested interests – the Insurers lobbying on policy, the TPR seeking political cover against any sniff of a pension scheme in trouble, and the Gov’t flogging Gilts to the coerced Schemes hoovering them up like junkies accepting anything passed to them by the DMO.
Market interference always ends in trouble, and the concerns now with the coming compulsion is that this Gov’t (and the civil servants who allowed this mess to be created), not willing to have an open discussion about what went wrong, choosing the route of trying to fix the earlier dose of market interference with another, a similarly reactionary response rather than something based on market fundamentals.
Eventually we’ll get back to investing on fundamentals, hopefully with a phased transition and re-investment, something along the lines of the Hymans March paper!
I have more faith in Government and in civil servants not to stymie investment on fundamentals.
I hope that the nation does not blow its savings on another financial crisis as in 2008-9 or as our pension system did in the years leading to the crisis in 2022. I hope that we do not live for ever in austerity but take a view on the future which is positive and investable.
That means helping DB schemes to run on, invest in growth assets and help DC schemes to convert to CDC or transfer to shared ambition pension schemes (as Nest wants to be).
We will not get back the DB system of the last century but we will get a 21st century pension system that provides pensions for many more people and a source of capital for business that helps productivity return. I hope we will not be puzzling over a moribund economy or glorying over release from owning NatWest. I hope we will be proud of Britain and its pension system in 20 years time.
The £10bn loss reported by The Guardian and others is of course a massive understatement, so typical of governmental accounting.
£45bn was “invested” in the bail-out 17 years ago and will have been clocking up interest on government debt all this time, plus “governance” costs of monitoring and realising piecemeal the taxpayers’ investment.
I’m also not convinced of the claimed £35bn recovery, as we haven’t seen a proper accounting of that, either.
The £20.3bn spent bailing out Lloyds Banking Group during the financial crash was repaid, chancellor Philip Hammond reported in 2017.
Nine years after the government bought 43.4% of Lloyds, a total of £20.4bn had been recouped – although that value does not account for inflation.
The government began selling off its Lloyds stake in 2013, and by 2017 held just 2%.
Mr Hammond “hinted” in 2017, however, that the 72% stake in Royal Bank of Scotland may be sold at a loss.
And let’s not re-open Gordon Brown’s “golden” sell off in 1999, nearly half of the UK’s gold reserves at a time when gold prices were near a multi-decade low.
I wonder how many billions of the £10Bn loss of the taxpayers’ loss on The Royal Bank of Scotland has ended up in the pockets of the Massachusetts Mutual Life and the Singapore Sovereign Wealth Fund and non UK based hedge funds etc.? We need a full investigation, not some grudging disclosure in a note to the Accounts obscured by questionable accounting disclosures over the years.
The culture of the past 30 years is that a pension scheme associated with an employer is always a liability to be got rid off, when if invested for growth it becomes an asset. We need an urgent re-appraisal of the situation by financial markets so that a pension scheme is always viewed as a company asset valued on its income earning potential; and not against some arbitrary Government set factor which has been highly volatile both on a short term basis, and between 2009 and 2022 totally irrational as an investment policy (effectively “you should invest to lose money”).
The Pensions Bill proposals arising out of the Options for DB Schemes may be viewed as starting to address these issue by suggesting that the pension schemes investments can provide value to the employer. Unfortunately the headline grabbing suggestion that it could be taken out as an immediate lump sum and generate tax revenues, has obscured the prospect of a financially well managed employer using the pension scheme assets to generate growth through the reduction of its future employment costs and the recruitment and retention of a workforce with “generous” defined benefit pensions. Contributions into a DC pension scheme are a dead cost to the employer giving little incentive to do other than minimise them.
i believe we will quickly come to discover that “risk Transfer” has resulted in the transfer of pension scheme risks onto the employer with the consequences that the UK productive economy has shrunk!
That £10bn reported loss is just the taxpayers’ headline loss on its 2008 share investment, Pensions Oldie.
The pension fund is something else.
Closed to new DB members in 2006, an initial £800m
of the taxpayer bailout funding was earmarked in 2008 to prop up the RBS “non-contributory” pension fund.
A 2% annual revaluation benefit of cap was then reported in 2009, yet by 2013 RBS was still committed to pay a further £5.2bn into the fund over the next ten years.
As at 31 December 2015, the fund still had a deficit of £5.9bn.
The taxpayer-owned bank then made a further £4.2bn contribution to the fund in March 2016, which was estimated to have bumped up the funding ratio to 99% as at the end of 2016.
In 2018, RBS signed a yet further agreement to inject up to £3.5bn into its DB pension scheme, it said “in preparation for ring-fencing legislation”.
The size of the RBS pension fund was said to be £45bn in 2018 (coincidentally the reported value of the taxpayer bailout in 2008).
Yet by 2024, no doubt with losses during the LDI meltdown in 2022, the scheme size seemed to have fallen to around £33bn.
That year Natwest Group agreed a buy-in transaction with a third party insurer, with around a third of the main section of its DB pension scheme to be covered by insurance policies.
According to media reports at the time, the pension trustees transferred around £11bn of assets to purchase a pension buy-in with Rothesay, owned by Singaporean sovereign wealth fund GIC and American insurer MassMutual.