A black swan and a mallard
The blog yesterday in which I criticised Scottish Widows’ move away from a “home bias” and towards the diversification that DC accumulation has seen over the period of AE workplace pensions may seem “political”. I agree with that opinion but do not take it as a criticism.
If we are to isolate our pensions from politics then we will accept that its capital has no part to play in reviving the economy. But, as I learned from sessions on fiduciary duty with the LGPS, we cannot take the state of British society – its economy and its culture – out of the jobs of trustees and those who manage DC savings plans (to be pensions in time).
Tom McPhail violently disagrees with me and he will disagree with Ros Altmann when she presents on Tuesday at the Pension PlayPen. He would have regarded Toby Nangle on Wednesday and he will go on disagreeing with Torsten Bell and Rachel Reeves. Here is Tom commenting on my piece yesterday criticising Scottish Widows and Lloyds for transferring money to the USA to capture anticipated returns that can be extracted from US markets.
| Tom McPhail
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Couldn’t disagree with you more Henry. I applaud Widows for the stance they have taken. The chart in your piece shows the cost to members if scheme trustees had indulged the Government and weighted towards home bias. Lost investment returns. The argument then is the hypothetical counter-factual; that by pursuing home bias, the schemes would boost economic growth; a self-fulfilling strategy.
I can’t buy this argument. Like the UK government’s vain and ridiculous Net Zero strategy, which will do nothing for climate change and will serve only to impoverish the very people they purport to care so much about, the Mansion House compact will not of itself shift the economic dial. Many other, more impactful policy initiatives can be pursued to stimulate growth, on energy, welfare costs, employment taxes, immigration etc there is a multitude of things this Government could do. Just as businesses should focus on making money for shareholders, pension schemes should focus on optimising risk-adjusted returns for members. Rather than this dirigiste, top-down, technocratic socialist approach, the Government should focus on clearing the runway for business enterprise and risk taking; alongside this it could pursue initiatives such as the National Wealth Fund, the Growth Partnership, LTAFs and so on to make it easier for pension schemes to be able to, and crucially, to want to invest in British businesses. Until then pension schemes should members’ interests first and not forget their fiduciary duty. |
This viewpoint is I am sure the common view and I have been out of step with expert opinion before on this blog, most notably in the years prior to the crash of LDI when questioning borrowing money to up holdings of gilts. I am sure I am out of tune with the experts in supporting the Pension Schemes Bill’s call for a handful of mega funds at the expense of thousands of inefficient DB and DC schemes.
Here is Byron McKeeby with a rather more nuanced version of Scottish Widows position is also commenting on my blog
| Byron McKeeby
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In reply to Tom McPhail.The Widows was apparently overweight UK during the period covered by that chart, Tom, so the “cost to members” may have already been experienced to some extent.
I could make a case for overweighting certain UK shares and other assets based on relative yield, but with the proviso that said assets overall also deliver(ed) growth. Passive investing in (including so-called active investing relative to) UK market indices is less likely to achieve that kind of absolute performance consistently. It remains to be seen, with future hindsight, whether the timing of this year’s reduction in UK weighting will prove beneficial |
But what Scottish Widows is doing is more than sticking two fingers up to the Accord and rejecting the political argument that our society needs to keep more of its capital in the UK in favour of what it considers “fiduciary duty”.
Byron is of course being very sly, by pointing out that any decision of the type taken by Scottish Widows is speculative as there is no proof that US markets will outperform home markets just as there was no certainty that gilts would remain at 2021 yields.
As a nation we have a bias in our pension investment to bonds, not least because we turned off the supply to DB pensions (future contributions). Is that not political? Is this not why our investment in growth assets, especially UK growth assets has fallen away as it has?
There have been enormous changes in the shape of our retirement provision and it includes a mania for diversification, more than any other G7 company. So we have no home bias and therefore very little capital working for Britain. My understanding of banks such as Lloyds is that they are a part of our societal fabric. We bailed it out in 2009 and if that wasn’t “political” , I don’t know what was.
My view is that pensions are not independent of British society and have played and will play an important part in it. What is happening at Scottish Widows is not an attempt to please Government but an attempt to fall in line with what has happened in the past.
Presumably Scottish Widows thinks it is de-risking its portfolio from ongoing divergence. This is the point that Byron comes out with..
 Byron McKeebybyron.mckeeby@outlook.com 192.0.87.116 |
In reply to Nigel Hawkes.Do institutions like the Widows really “maximise” returns, or do they not tend more to target market relative returns, and use market performance as their excuse when answerable to savers?Just asking for a friend … |
I am with Byron. My hope is that we will see organisations like Scottish Widows (Lloyds) taking a lead in the future. All the signs are that they won’t and that they will hope the market will return to what made them money without taking risks as DC has grown.
The decline of the UK economy, as highlighted by Smithers and Bell, has sparked a debate on investment strategies. One approach advocates for government-directed channeling of pension fund capital, potentially via aggregators like NEST, into UK companies and infrastructure. This aims to boost domestic investment and long-term growth.
An alternative perspective champions supporting small and new businesses through enhanced tax incentives like SEIS and EIS. The argument here is that fostering entrepreneurship and innovation at this level will naturally improve productivity per capita. To fund this, and potentially stimulate saving over spending, a shift towards consumption-based taxation (increased VAT) is proposed, alongside maintaining current interest rates around 4.25% to ensure financial stability without stifling investment. The core disagreement lies in whether top-down or bottom-up investment stimulation is more effective for economic revival.
The concern is that if money is invested in existing large companies the money will find its way into the pockets of senior management through share incentive schemes and buy backs as has happened since 2000. This has deprived companies of capital for investment and produced very poor performance for shareholders. The current proposals for mandated investment is naive. CEOs need to be incentivised by long term profits not quarterly figures and surviving in post long enough to get rich.
The American market is significantly overvalued.
I have observed that the further the client is removed from their money the poorer the investment performance. Lazy money gets lazy returns.