John Plender has been an FT correspondent  as long as most people have been alive and lately he’s started turning up at Pension PlayPen coffee mornings, which has made us very happy, as John’s deep knowledge of markets is important to our discussions and we hope our thoughts on pensions influence his articles.

This weekend he has published an article about the FTSE 30 which the FT has dragged out of the cupboard to compare it with FTSE 100 and the progress we’d have made if we’d stuck with investing in British behemoths. Only Tate and Lyle has made the distance since the FTSE 30 was started and the results of the FTSE’s revelation of a little considered index end an article by John Plender which is a history of FTSE30

..how well would a long-term investment in the FT30 have performed for investors and savers? Badly, is the answer. As said earlier, it has underperformed the FTSE 100 and the FTSE All-Share for several decades.

To put it crudely, the FT30’s preponderance of stodgy mainstream UK big-cap stocks has not helped relative to a FTSE 100 that derives four-fifths of its revenues from overseas. Yet the FT30 has rewarded investors in other ways. Most notably, the changes in its composition provide a remarkable insight into the evolution of the economic landscape and into structural change in British industry and commerce.

In place of heavy manufacturing, textiles and construction materials in 1935 have come banks, insurers, media groups, consumer goods and telecoms.

So, in a curious way, this venerable index resembles an ever-changing virtual museum of industrial archaeology, even if that highlights the declining relevance of London for some institutional investors as they look across the Atlantic to the S&P 500 and Nasdaq.

Ironically, it was John Ralfe’s tweet (on the twitter algorithm) that brought the article to my attraction

John Ralfe was certainly included in John Plender’s history of the index and indeed of Britain’s approach to investment in its equity and its debt.

In due course, history repeated itself in reverse when, at the turn of the century, there was a wholesale shift away from UK equities back into bonds, partly prompted by changes in taxation and accountancy regulations, mainly affecting “defined benefit” pension funds. In a move pioneered by John Ralfe, then head of corporate finance at retailer Boots, DB pension funds turned to investing a vast majority of their portfolios in high-quality bonds.

By seeking assets on which the income closely matched pension fund outgoings, they reduced the volatility of pension scheme funding while hedging interest rates and inflation risk. As a result of this de-risking, pension funds’ holdings of UK equities declined to near-negligible levels, causing growing political concern about waning support for British industry and commerce.

You can read the paragraphs as you like, pensions are certainly more stable against a marked to market approach for accountants , though the impact of waning support for British Industry from pensions is a concern for more than Government.

It is a matter of some importance that we study the history of equity investment in the UK as from it , we may get an understanding of investment going forward.

It is certainly a good time to take a few minutes out to read John Plender’s article, there is a free option on this link, if it has run out, please mail henry@agewage.com as I have some spare “spares” for June!

Comment from Pension Oldie

I have strengthened the blog with a comment from one of our regular commentators

Interesting!

John Ralfe’s bond based approach in mark to market valuations for pension schemes appeared to me to be entirely backward facing.  You are looking at the pension liabilities of a past cohort of workers and matching them to bonds and gilts issued to meet the past capital requirements of the issuer, whether that be a corporate or Government.

DC pension arrangements from the employer’s point of view are little more than an employment tax, and one that cannot be reduced in the future by the employer, unless they end the employment of their current workforce.  They are also subject to legislative pressures such as increasing minimum contribution levels or even additional tax dependent on the investment policies of the pension provider over which the employer has no control.

To secure growth of UK employing companies, we do need to look for a forward facing pension system.  One that looks at not just the run out of the pension rights of past employees (the DB Funding Code), or entirely focused on current employees (DC contributions); but includes the pension prospects of future employees.  One that can reflect the potential of “productive” investment to hold out the prospect of reduced employment costs and thereby reducing the risk to employers of expanding their payroll either in number of employees and/or by increased salary levels.  This would encourage economic growth and Government tax revenues far more than the encouragement of investment in any particular asset class and over which the employer has no say.

The one existing pension arrangement that appears to address all these issues is employer sponsored fully open DB!