Thursday, December 6, 2012

A UK Sovereign Wealth Fund?

Robert Peston of the BBC reports, A UK sovereign wealth fund?:
One of the reasons infrastructure investment by British pension funds is relatively low, compared with (for example) infrastructure investment by Canadian pension funds, is that the UK's pension fund industry is fragmented: there aren't that many huge pension funds with the resources and appetite to make big long-term investments in new roads, or railways or airports.

And to tell you what you already know, the UK doesn't have a huge sovereign wealth fund, of the sort they have in Norway, much of the Middle East and Asia, keen and able to make massive long-term investments in the gubbins that underpin a nation's ability to grow and create wealth.

The Treasury tried to correct this flaw by encouraging the National Association of Pension Funds to create a so-called Pensions Infrastructure Platform (PIP), which brings together disparate pension funds with a collective interest in putting debt and equity into new British infrastructure.

According to those involved in the PIP, progress in herding the pension funds has been a bit better than might have been expected. It has eight founder members, which will collectively provide about £1bn, and a further £1bn will be raised from other funds next year - with the formal launch scheduled for the first half of 2013.

My understanding however is that Downing Street and the Treasury are engaged on a more ambitious project, to investigate whether it might be possible to create what might be seen as a British sovereign wealth fund.

I have learned that officials are looking at the assorted pension schemes for public sector employees that are funded (to use the jargon), and actually own shares, bonds and other investments, to see whether they could be merged in some way.

For example, in England and Wales, there are 89 local government pension schemes, which collectively owned £148bn of assets, as of April 2012 (according to data supplied by the pensions consultant John Ralfe).

If these funds acted collectively, they would have enormous investing power - and would be quite big enough to make significant investments in infrastructure.

So for ministers, trying to find a way of pooling this £148bn would seem eminently sensible.

And maybe other public sector pension assets could be put into the pot, such as MPs' £426m of pension assets, or the £18bn of miners' pension assets guaranteed by the government, or even the £28.5bn of Royal Mail pension assets that the Treasury acquired this year.

However, there is quite a big obstacle to creating a public sector superfund, which is that each of the separate schemes has its own trust deed and trustees - and getting them to agree to merge would not be easy.

So I don't know whether the chancellor has enough confidence that a big fund can be forged to mention it in today's Autumn Statement.

But the underlying theme of what George Osborne will say today is that it is becoming more and more urgent to unlock resources that could stimulate growth.
After hiring the Bank of Canada's Mark Carney, it only makes sense that Osborne toys with the idea of creating a UK sovereign wealth fund. Guess the Brits are embarrassed that Canadian pensioners own their most prized infrastructure assets.

But the focus of the UK budget wasn't on this new super fund. Despite being warned by the National Association of Pension Funds (NAPF) to keep hands off pension tax, Osborne moved ahead with a "fat cat" pension tax that may hurt middle earners:
The government plans to raid the pension pots of the wealthy as part of efforts to cut the country's deficit will also affect middle-income earners and may discourage workers from taking part in pension schemes.

The amount workers can put in their pension pot before it gets taxed has been reduced to 40,000 pounds a year from 50,000, and the total a worker can accumulate tax-free throughout their lifetime now stands at 1.25 million pounds.

The move will raise 1 billion pounds towards cutting the country's deficit, finance minister George Osborne said on Wednesday.

"This will reduce the cost of tax relief to the public purse by an extra 1 billion pounds a year by 2016-17," Osborne said in his half-yearly budget statement to parliament.

Osborne said the move would only impact the very largest pension pots, but pension consultants disagreed, warning it could further erode confidence in pension schemes and undermine government efforts to get more people saving for their retirement.

"Osborne claims he is taking a carrot away from the rich, but he is also beating many middle class savers with a stick," Joanne Segars, chief executive of the National Association of Pension Funds, said in a statement.

Because of the way that pensions under "defined benefit" pension schemes - which promise staff a pension based on their final salaries - are valued, many middle-earning members could be penalised.

A modest promotion after years of built-up service and contributions to a pension scheme could result in one-off tax bill for moderate earners.

Public sector workers may decide to retire early to avoid their retirement funds being taxed, city law firm Berwin Leighton Paisner said in a statement.

"If there are doubts over the future tax treatment of pensions, people at all income levels might be less willing to save into pensions vehicles," Paul Sweeting, European head of strategy at J.P. Morgan Asset Management, said.

The move comes 18 months after the UK government cut the amount workers can pay tax-free into their pension from 255,000 pounds to 50,000 pounds in April 2011, making thousands of workers liable for a tax charge on their pensions.

On a positive note for workers, the government will allow retirees with so-called "drawdown plans" to take an extra 20 percent of income from their pensions pots.

A drawdown plan allows people to keep their pension invested while taking an income to support them in retirement.
I don't have much to say about this "fat cat" pension tax except that it's another boneheaded move by British politicians looking to introduce hard and soft austerity measures. Notice how many public sector employees will retire early because of this move (this is exactly what the government wants).

Not surprisingly, Osborne is being attacked over pension moves. Some of Britain's elite are stepping up warning that it's not only the ultra-rich that will be hit.
Mark Dampier admits he's lucky to be able to afford to put £50,000 a year into his pension, but is furious at the £4,500 tax charge he faces paying when the £40,000 cap on contributions is introduced.

"Everybody thinks that it's rich bastards who should be taxed more. It's in tune with the times. But it's already the case that the top 10% of earners pay 55% of all income tax. In the past few years we have lost personal allowances and have been busy paying 50% and 45% income tax rates. My national insurance has also gone up like a rocket. Remember when Gordon Brown said the extra NI was there to pay for the NHS? I might have been happy with that, but the NHS is now bleeding dry."

The cut in pension relief won't just hit the rich, he says. "It won't just affect me, but people such as headteachers and GPs in final-salary schemes. It's not just the ultra-rich who will be hit. And what nobody ever says is that the pension system is tax neutral. Yes, I get 45% tax relief on the sums I put in, but when I take my pension I'll be taxed on the income at the other end."I'm lucky to be able to put in virtually the full [£50,000] amount, I agree. But do I think that's wrong? Not at all. I didn't put much into my pension when I was younger as I didn't have much money. And now that I'm doing so, it's supposed to be so terrible. I know no one is going to shed tears for the likes of me, but the constant tinkering with pensions is bad policy."

Dampier is probably one of Britain's best-known financial advisers, as head of investments for Hargreaves Lansdown, based in Bristol. He reckons the latest raid on pensions will drive even more people away from saving for their retirement. "Pensions have now got such an atrocious name. Whenever I look below the line at comments on pension stories they are incredibly negative. If someone asked me 30 years ago, I would probably have agreed with them that pensions were rubbish and full of high charges. But that's just not the case today."

He blames the Liberal Democrats for "political bargaining" that has resulted in the cap on pensions. "Why don't they reform the whole system rather than this piecemeal approach? They should put in place a once-and-for-all change rather than chancellors constantly meddling."
More pension politics but I'm not worried about "fat cats" like Dampier. He'll be fine in his golden years. It's the struggling middle class and working poor that face looming pension poverty and the message the government is sending is all wrong, introducing a strong disincentive to save for pensions.

When it comes to pensions, the mantra of the day is "let them eat cat food." Governments around the world are bending over backwards, pandering to banksters, but doing nothing to address income inequality that threatens our democracies.

Below, a popular video narrated by Ed Asner, written and directed by Fred Glass for the California Federation of Teachers, with animation by Mike Konopacki. Think we've reached a "Hegelian moment". If the fat cats don't watch it, they'll lose a lot more than their pensions.