Reeves Says her Pension Megafunds Could Invest £80bn in Britain. Why Would They?

If you want to know a person or society, attend to which lessons they are incapable of learning. In Britain’s case, an obvious candidate would be that prosperity cannot be conjured or redistributed on the State’s orders.

Regular readers will be familiar with ‘The Plot Against Mercia‘, a soul-crushing telling of how post-war governments tanked the prosperity of the Midlands and other regions by deciding that they were too prosperous, and trying to move some of that to other parts of the country by decree. This proved much more reliable at making the first group poorer than the latter richer.

Yet generations of politicians learned nothing. Consider Michael Gove, simultaneously praising the laissez-faire building boom of the Victorian era (primary benefit: enormous labour mobility and the complete transformation of Britain’s human geography) and insisting that levelling up meant that “you shouldn’t have to leave somewhere you love in order to have a truly fulfilling career” (meaning: we’re not building homes in the South, stay where you are).

This isn’t a purely British problem, of course. American government policies aimed at increasing home-ownership had no little role in the sub-prime crisis; banks may have re-packaged the bad loans and poisoned the market, but banks are not usually in the habit of making vast numbers of bad loans if left to their own devices.

But the United States is much richer than Britain, and so has less need of such conjuring tricks. Whereas for poor ministers in Westminster, screaming in the trap, it’s just about all they’ve got. Cue Rachel Reeves’ exciting new plan to force council pension funds to invest in British infrastructure. Maybe.

It’s a bit of a puzzle. All of the political messaging around these proposals (which may be a good idea on a purely technical level, this isn’t a financial outlet) is that it will create consolidated pools that, according to the Times, “will unlock as much as £80 billion worth of investment in ­businesses and infrastructure”.

At this point, alarm bells might be ringing. Nothing quite says ‘future trouble’ like ministers forcing private actors to invest their money in the way that best suits politicians, especially when those private actors are responsible for the pensions of millions of people.

Happily, the Chancellor says that there is no question of the Government forcing these funds to invest in British assets; they will still be expected to focus on delivering the best return for their savers, as is proper. (We’ll return to this.)

But if that’s the case, given that the British stock market accounts for only around four per cent of the global one, why would these funds make huge additional investments in the UK? The Government has an answer:

“Canada’s pension schemes invest around four times more in infrastructure, while Australia pension schemes invest around three times more in infrastructure and 10 times more in private equity, such as businesses, compared to Defined Contribution schemes in the UK.”

Fine. Not mentioned, however, is whether the Government’s analysis established pension fund size as the critical factor here. It probably matters, when assessing how likely any megafund is to invest in “exciting new businesses and infrastructure and local projects”, that this country is abjectly terrible at building infrastructure, has businesses closing at a record rate, and a government so desperate for revenue that it’s taxing critical sectors such as nurseries and social care to the point of collapse.

Sure, a new megafund might be more inclined to take risks on exciting businesses and place long bets on major infrastructure projects. But a sensible one would probably do that in Canada or Australia, rather than here.

Which brings us back, as promised, to the question of ministers forcing funds to invest where they’re told. Because alas, Reeves seems not to have avoided completely this temptation:

“Local economies will be boosted by the changes as each Administering Authority will be required to specify a target for the pool’s investment in their local economy, working in partnership with Local and Mayoral Combined Authorities to identify the best opportunities to support local growth. If each Administering Authority were to set a 5% target, that would secure £20 billion of investment in local communities.”

Oh. At least this means that only three-quarters of the Government’s £80bn investment figure is pure speculation; there’s a baseline of coercion to give a little certainty.

Five per cent might not seem very much, and perhaps, in the context of a big and well-managed megafund, it isn’t. But there are two important things to bear in mind.

First, if these “opportunities to support local growth” were actually the best investments available, funds wouldn’t need to be forced to make them. Whatever the benefits for local communities, therefore, the obvious inference is that they will come at a cost of lower returns for the funds, and thus represent a sort of stealth tax on anyone in the Local Government Pension Scheme.

Second, there is a world of difference between “we’re not going to tell pension funds how they spend their money” and “we are going to tell pension funds how to spend their money, but only five per cent of it”.

For ministers in a land without growth, it’s basically the difference between being a non-smoker and a light smoker. When Reeves has next to scramble around for cash to splash (and it’s not just us saying that’ll happen), eight huge piles of other people’s money are going to look awfully tempting. ‘Just once more, right? We’ve pledged to be really strict with ourselves in three years’ time.’

Is there some other way the Chancellor could have incentivised British pensions to invest locally?

Well, Gordon Brown’s pensions tax raid led funds to substantially reduce their investments in the UK. The London Pensions Fund, for example, has cut “exposure to UK equities” by 60 per cent since 1997, according to its chief executive, whilst the overall shift has been even worse:

“[T]he reduced incentive for UK pension funds to invest in British companies means that they and other institutional investors now own just 4% of UK-quoted shares compared with half of them in 1997.”

So what we seem to have, basically, is the new Labour government taking baby steps towards forcing pension funds to make the sort of investments the last Labour government pushed them away from. What a very flat circle our times are proving.