UK Chancellor Jeremy Hunt has announced new private pension scheme reforms, with one key element being a voluntary contribution towards fast growing UK businesses. Will it work in long term, pension scheme profitability terms, or will the State simply spend the cash on favoured public sector supplier companies, fashionable new tech trends or politically approved Net Zero compliant projects? Here’s some comments;
SCALE UP INSTITUTE
A warm welcome to the plan from an association that seeks to help smaller companies reach a global audience. The Scale Up organisation has sponsorship from big hitters like NatWest, 02, Google, WPP and crucially, the British Business Bank – which is 100% owned by the UK government. The Scale Up Institute CEO Irene Graham said on Twitter;
“The reforms contain significant and innovative solutions, which will help to enable easier access to capital markets.”
ABI CAUTION
The ABI welcomed the Chancellor’s plans in general but warned on the the potential erosion of savers cash long term.
“We want to see successful, enduring pensions policies that help deliver better returns for savers as well as boosting the UK economy & we fully support the Government’s ambition to achieve this. However, any market-shifting reforms…must be thoroughly considered so they put savers first. Pensions reform must be evidence based.”
It’s a fair point, evidence that investments in smaller companies need to have a process of due diligence underpinning every decision. The risks that we saw with the rushed allocation of PPE contracts during the early stages of Covid 19 highlight how poor oversight can lead to contracts being handed out to hastily formed companies, or companies run by relatives and friends of government Ministers. Then there is the ongoing Bounceback loan fraud. That level of corruption and incompetence cannot happen with pensioners cash, no matter which government is in power.
PROJECTIONS ARE NOT RETURNS
Financial journo Patrick Hosking in The Times notes that Chancelleor Hunt made predictions of returns that would break current FCA rules. You can’t sell a pension with guranteed returns, it’s as simple as that notes Hosking;
“Jeremy Hunt’s announcement that his reforms ‘will increase a typical earner’s pension pot by 12% over the course of a career’ would be vetoed by the FCA instantly”
THE COST OF CAPITAL
Borrowing costs can vary of course, so one benefit to the insurtech sector would be investment at a relatively, or below market, interest rate. Some insurtechs in the UK have used crowdfunding to raise capital, others have traded equity/control stakes for VC cash. aS A SECTOR, uk insurtech and insurance start-ups have done pretty well in recent years as money supply has tightened.
But as the recent problems for Onto highlight, good ideas don’t always translate into profitable businesses. Everyone involved in enabling Hunt’s plans should bear in mind that these are long term investments. Not a loan to buy market share, which in turn leads to an IPO then a fast exit for the founders.
Todd Davison, MD of Purbeck Personal Guarantee Insurance commented:
“At Purbeck Personal Guarantee Insurance, we wholeheartedly welcome the review and enquiry into the financing of SMEs. As a champion of small businesses, we want to see barriers to finance broken down. SME finance can provide an important lifeline for businesses trying to tackle the macroeconomic headwinds such as inflation, the cost of living crisis and rise in interest rates. Access to responsible finance is critical to provide SMEs with the breathing space to get through this challenging time.”
That is a valid point; every start-up needs cash to hire staff, expand into new geographical markets, set up distribution chains and more.
ACTUARIES ACTUALLY UNDERSTAND INVESTMENT
Perhaps the most balanced and thoughtful commentary is from the IOFA;
Commenting on the UK Chancellor of the Exchequer’s Mansion House Speech in the City of London last night, Debbie Webb, Pensions Board Chair at the Institute and Faculty of Actuaries, said:
“It is good to see the initiatives set out in the speech seeking to increase pension scheme investment to support more growth in the UK economy, particularly where it is also likely to improve long term outcomes for savers. However, it is important to recognise that pension funds already own and contribute to UK assets in a range of ways such as Government bonds, equities, and infrastructure. The assets most appropriate for investment will always depend on the pension fund and its structure whether defined benefit (DB) or defined contribution (DC), open or closed. Any investment decisions need to be taken in this context.
“If DC schemes invest in appropriate growth assets, there is an opportunity for improved outcomes for savers. Similarly, we are strong supporters of Collective Defined Contribution (CDC) schemes and believe they have the ability to deliver good long-term outcomes for members while also facilitating higher allocations to growth assets for longer than is usually possible in other schemes. We look forward to changes to CDC legislation to allow a wider range of schemes.
“We support the initiatives to put an appropriate process for consolidation in place, that would provide options for some DB schemes However, there are complexities associated with DB consolidation which would make any compulsion in this regard highly undesirable.
“This package of measures must be set against the context that the primary purpose of a pension fund is to provide a retirement income for its members. The fiduciary duty that a pension fund holds to its scheme members means that investment in new assets should only take place where longevity is weighed and there is an appropriate risk/return ratio. It is important that these measures are carefully calibrated to match both growth requirements and policyholder protection concerns, and we would not be supportive of any initiatives that sought to compulsorily require schemes to invest in particular asset classes, or to consolidate.”
INVESTMENT OPPORTUNITY?
Nicholas Hyett, Investment Analyst at Wealth Club Commented:
“The Chancellor has some big ideas for small companies. His efforts to improve access to later stage funding for UK start-ups are very welcome. The success of the SEIS, EIS and VCT schemes means the UK is now the start-up capital of Europe, but we’re still struggling to support companies in transitioning from plucky, disruptive start-up to global tech giant.
A lot of that is down to the difficulty raising later stage capital in the UK. Entrepreneurs either have to look abroad or sell up to an established global player – and that means the UK economy is missing out on the benefits of having its own Apple or Nvidia. However, there are no easy fixes and reforms need to be handled carefully if they’re to deliver the hoped for benefits without inadvertently damaging the UK’s already impressive investment ecosystem.”
IE COMMENT
UK POLITICIANS CANNOT THINK LONG TERM, THEY ARE MOSTLY SHORT TERM GRIFTERS
Therein lies the problem in a nutshell; which UK government of the last 50 years can you name which took a genuinely wise long term view on investments or pensions?
Norway has a vast $1.3 billion sovereign wealth & pension fund generated from its oil and gas exploration. By contrast the UK has spent all its oil profits since the 1980s on building up a bigger, some might say international, benefits system, fighting wars and expanding the headcount in the public sector. The UK hasn’t built a new reservoir since the 90s. Ditto nuclear power stations. There is no UK owned car, motorcycle, bus or train manufacturing of significant scale in the UK – nearly all high volume, heavy engineering, vital infrastructure manufacturing is foreign owned. Apart from defence specialist BAE Systems the UK owns virtually nothing that can keep the lights on, move people en masse, or provide clean drinking water. Shameful.
We are a nation which invented the internet, then gave it away free. We have no Microsoft, Amazon, eBay, Twitter, Nintendo, Paypal or Facebook rivals of that global brand level scale, even with a head start in IT which goes back to Clive Sinclair and BBC Acorn computers in every school. We sold off our biggest silicon chip manufacturer, ARM, just as world demand for chips began to skyrocket in 2016. As a country we have no strategy at all to invest in essential infrastructure companies or protect them from foreign ownership. China sends its best and brightest to our Universities, sponsors a building or three, then cherry picks the most innovative ideas and copies them back home.
These are the people you are going to trust with 40 year pension investments? As Sir Michael Caine might say, “Do me a favour!”
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