Straight talking from the Editor’s keyboard;
Pensions, both State and private, are generally below the EU average in the UK. The exception to this rule is public sector pensions, which are primarily funded by taxation, not the invested contributions of employee and employer (which is again, the State funded by general taxation). The opportunity is there for insurers to provide ring-fenced funds, which are invested in high growth industries, the digital ecnomy, or cartel operations like utilites for example, where there is no real competition and profits are generally good long term, even adjusted for inflation.
The time is right for the industry to be bold and offer new solutions, because not everyone wants to depend upon the State in their old age – although most people in the UK are in receipt of some sort of benefit. When it comes to pensions just a quarter of UK adults believe the government has done a good job of helping those nearing or in retirement during the cost-of-living crisis, according to new research by My Pension Expert. They commissioned an independent survey of 2,000 UK adults. It found that only 25% of people who have a pension feel the government has provided sufficient support to pension planners over the past 18 months – falling to a mere 14% among over-55s. Most (56%) think the government lacks a clear strategy for improving outcomes for UK pension planners. This comes at a time when half (51%) of UK adults with a pension say high inflation and rising interest rates have made retirement planning a more challenging undertaking. In short, nobody can work out what level of income you might need 20 or 30 years from now, or what level of annuity and pension pot might provide that magical 25-40K per year.
IS UK GOVERNMENT ANTI-BUSINESS? YES AND NO My Pension Expert’s research also showed that, less than two in five (38%) are comfortable with their pension funds being invested in British businesses to fuel economic growth – a negative response to the recently announced Mansion House Reforms, which essentially freed up cash for more climate change virtue signalling, rewilding wastelands and 1,000 person rental apartment blocks in digital cities. In a nutsell private pension funds will be shadow managed by government, certain projects will get the green light and others will not – much will depend on the political ambitions of the government in power at the time. But is that short termism a sensible way to invest pension cash? No, not at all.
The UK government does borrow heavily to offer grants and loans to UK businesses. There is a Department of Business, Innovation and Skills, which spends heavily on start-ups, training and more. Medium size companies can often get help in showcasing their services at overseas trade fairs and expos. The UK govt also helps fund major projects and provides tax breaks for overseas and UK companies in Freeports too. It’s all good.
However there is a strong argument that very few people in the public sector understand business, or regard making a healthy profit as a good thing, in fact, they often see profit as an inherently bad thing and believe that State ownership of assets is always better than private. One glaring example of that hatred for profit is the rise in Corporation Tax, which small traders and start ups cannot easily avoid – but large corporations can. Then there’s the abolition of tax free dividends for Directors, essentially you are taxed at 20% CT on profits, then 25% on meagre wages – a 45% tax rate for sole traders earning £15-30K a year. Wow, up the workers!
GLOBAL THINKING AFTER BREXIT
The UK insurance sector and the City in general, are in a good position right now to invest in high growth companies worldwide, thus offering UK citizens a chance to share in the global wealth being created by companies based overseas and paying very little Corporation Tax. If Google, Glencore, Facebook, Apple or Amazon find ways to minimise their local CT or business taxes, then why shouldn’t UK pensioners benefit by having a stake in those companies?
But it isn’t all about tax regimes. Investing is a mindset, it’s balancing profit against unwritten social contracts. Good business is about values, as musy as asset values. That’s why we have a green agenda underpinning much of the UK economy now; no more coal, oil, one nuclear power station, no major new roads projects, no fishing industry etc. – it’s all about the feelgood factor.
But after a decade or so of climate change and Net Zero fearmongering, there are signs that the mood music is changing amongst global investment funds, as they realise that wind turbines waiting for the right wind speed, dead coastal towns and spent battery farms cannot all be good bets long term. People in boardrooms who greenlit the Series A-D rounds are starting to do that Tom Cruise thing and shouting “show me the money!” at the woke CEOs and diversity managers.
Reuters recently reported that big hitters like Blackrock and Vanguard are becoming less keen on phasing out their fossil fuel, or industrial holdings, just to suit green-haired activists living off their grandparents’ trust fund. In short, they are bored of making pledges and want to make money. Here’s an extract;
“Focusing on the world’s four largest asset managers, InfluenceMap said Vanguard and Fidelity Investments supported 4.5% and 4.8% respectively of resolutions the think tank describes as “climate-relevant” in 2022. BlackRock (BLK.N) voted for 12% and State Street (STT.N) 15%, the researchers said.
In response to the report, State Street said it would continue to engage with companies on material risks and opportunities. Fidelity did not immediately comment.”
FOSSIL FUEL MIGHT MAKE A COMEBACK
Fact is, from smartphones to internal doors, clothes to food packaging, oil is the raw material that makes it happen. Over in China, they not only use lots of oil and gas, but to power their workshop of the world green revolution they’re building coal fired power stations too. The e-scooter or e-bike you think is a green transport option has materials mined by children in Africa, batteries made in China and is assembled under lighting powered by coal from Australia. But yeah, definitely a greener option than driving a Toyota Avensis into town…
Over the last three years or so major insurance brands have made a huge song and dance about exiting the coal market; no more investment in new mines, selling off holdings, withdrawing cover on coal based industrial activities. It’s a worthy cause, since coal burning creates old school smoke which damages lungs, contaminates land and ruins your washing on a good drying day. Your IE editor is old enough to recall smog in Britain, so thick you could not see the school bus approaching but you could hear its rattling diesel engine.
So what are insurers to make of Germany’s recent decision to tear down wind turbines to extract more coal? Offer no cover, leave the business open to Ping An perhaps, and by doing so feel better about themselves? Yes that’s pretty much the strategy.
The reason Germany is digging for coal is simple; it cannot have an industrial economy without it. You need vast amounts of reliable electricity to manufacture things, yes even 80K e-Audis. Sure, Germany can buy coal from Poland, which is not so bothered about mining as western EU nations, but the fact is green or renewable energy is expensive to produce, unreliable and often has a short lifespan compared to a coal fired power station which can generate for 50 years. The solution is to mine and burn coal better, cleaner and leaner, than we ever did in the smoky 1960s, not simply wipe it off the whiteboard at the energy solutions brainstorming meeting. It could help our energy independence and without that local, regulated energy supply, you have to competitive economy.
Here’s another thing; there is an almost childish reasoning behind the recent insurers blanket ban on investing in oil companies, or new oil drilling too.
Shell paid £1.5 billion in UK taxes in 2022. Compare that Google’s contribution of £201 million in 2021. The oil business can be lucrative and some companies pay UK tax, others avoid it, other oil producers are State owned and part of a regime which has people killed because they are a political or religious problem. The global tax, ESG and compliance situation is not a children’s cartoon with goodies and baddies, it is layered, complex and deserves some weighing of options when it comes to investing.
HARD CHOICES AHEAD
Coal, oil and gas are likely to power manufacturing of many goods and service infrastructure for several decades to come. If insurers want to sell pension schemes that actually DELIVER an annual profit to stakeholders, then they need to be honest about how they are going to accomplish that aim. The current situation of waffling on about carbon capture pie-in-the-sky, eco-housing for renters and benefits claimants, peat bog rewilding projects and other climate nostrums isn’t going to persuade consumers earning 50K a year or more to invest a chunk of it in a private pension scheme.
Assuming that UK and EU politicians continue to offshore industrial activity and impose more green taxation to fund their vanity projects, that leaves insurers with pension funds in a tricky position. They can go along with the regime narrative and throw money into a big green bonfire of the vanities, or they can funnel some of it into overseas ventures which will make a tidy profit.
At present the startegy is very much ESG driven; social good, B Corp, feelgood stuff etc. Trouble is, lots of feelgood business ventures go bust, just like old school fossil fuel businesses. Not every vegan burger chain is going to be a KFC, Burger King or Maccy’s rival. Lots of electric cars are going to remain unsold in 2030, especially if there’s a usage based tax on them by then, which some left wing politicians and activists are demanding now. Some wind farms will never make their investment costs back within the blade lifespan.
The uncomfortable truth is that a large percentage of the pension funds invested now in the green economy are going to be a total loss long term, you just cannot predict which projects will fail.
Once people realise that much of the “green economy” is essentially anti-profit, run by third sector charity CEOs and is a kind of medieval indulgence (a fee paid to the church to buy forgiveness from God), then pension schemes will collapse. Sadly, for those being mugged today by green charity chuggers masquerading as pension fund managers the penny will finally drop when it’s too late.
Profit may well be a dirty word, but it keeps the heating on when you are 80 plus.