‘Golden’ Brown’s cattle raid on pensions

Reposted from ‘Wolves of Westminster,’ 5 August 2024

The new Labour Government plans to use our pension money to fund infrastructure and clean energy, but there are some major problems with this idea.

We can see the attraction for a cash-strapped government. The total value of British pension investments is over £1,800 billion. Taken together with the near £2,000 billion assets of UK insurance companies, there is enough to pay off the national debt and still have a trillion left over. A goldmine! Why not put it to use for the nation?

The idea is in the Brown Commission’s comprehensive plan for Britain’s future, as tasked by Sir Keir Starmer and issued in 2022:

‘We see scope for greater private investment in our infrastructure from careful, long-term investors, like some of our large pensions and insurance companies, who need stable long term assets to support pensions in payment. The regulatory framework which governs those investments should not discourage it, and government and local leaders should work with the industry to devise the best mechanisms to attract private capital into these long-term public projects.’ [p. 83]

It was then included in Labour’s 2024 General Election manifesto:

‘Britain’s world-leading financial services industry has a major role to play in mobilising trillions of pounds in private capital to address the greatest long-term challenge of our age. Labour will make the UK the green finance capital of the world, mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement.’

The late, great Frank Field MP foresaw the temptation offered by juicy pension funds when he set up the Parliamentary Pensions Reform Group. The 2002 Civitas discussion document stressed [pp. 37-38] the importance of trustees in protecting the assets from outside interference:

‘Because it is desirable to curtail the influence of the government in running the pension, the trustees will be invested with quite considerable powers. These will also be established in the Act and will include:

• the power to appoint and dismiss fund managers and decide on the number of fund managers the scheme requires;

• the setting of investment strategy;

• the power to make changes in contribution rates.’

The primary responsibility of pension funds is to provide pensions. Using their assets for political objectives, e.g. to boost investment in the UK, risks compromising fund performance and thus the financial security of the pensioner.

Here are three drawbacks to Westminster’s proposed tinkering:

1. Over-investment in the UK. Writing for CapX, Tim Worstall says that UK pension schemes already allocate too much to the domestic market, when they should be seeking higher returns abroad from more dynamic economies. This is especially important now that many schemes have moved away from final-pension ‘defined benefit’ arrangements to ‘defined contribution’ plans, thus shifting the risk onto the beneficiaries, who will not know until retirement how much money they have, and what annuity or other form of income based on it they will receive.

2. The use of funds to develop ‘clean energy’. So far, most of the alternative energy provision is nowhere near cost-effective compared to oil, gas and coal. Without government subsidies and revenue guarantees, even nuclear power might falter. Besides, the supposed progress we have made in cleanness has been achieved by transferring industrial production to countries that press ahead with polluting power plants as they continue to catch up with our standard of living.

3. The ability of the market to front-run official initiatives. We saw this when Gordon Brown announced (on 7 May 1999) that he was going to sell half Britain’s gold reserves:

‘The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999. With many gold traders shorting, gold reached a low point of US$252.80 on 20 July.’

If the Labour pension/insurance initiative proceeds, look for pinstripe suits buying into the boost – maybe even forming start-up green energy companies, then exiting as soon as they sniff a policy change coming. Exploiting pensions and other investments for political and eco-fantasy ends may result in hobbling fund performance, hitting pensioners and savers while enriching smart hedge fund managers.

In short, ‘Golden’ Brown’s idealism and naïvety could cost the country heavily – again!