I have published this video this morning. In it I argue that pensions are in the news because they very obviously are not working for people in the UK. The trouble is, the solutions assume a bit of financial engineering, and pouring some more money into the bottomless pit of the City of London will solve the problems. As I explain in this video, that's definitely not true.
The audio version of this video is here:
The transcript is:
Pensions are in the news, and so they should be, because pensions in the UK are, in general terms, pretty lousy.
The state pension is far too low. It's much lower than that paid in most European countries, for example, about 38 per cent of the EU average, which is ridiculous when we are, supposedly, the sixth wealthiest economy in the world.
Private sector pensions are pretty bad too. Why? Because the City of London imposes massive charges on most pension products and enriches itself at cost to our future benefit as a consequence. That is bad news for our well-being. So we should be talking about pensions.
But, Rachel Reeves, when she's doing this, is, by the look of it, talking about forcing those who are auto-enrolled by their employers into the compulsory, or near compulsory anyway, state pension schemes to pay more money into those funds. There is no gain in this in terms of saving because, quite simply, this will be eaten up in terms of excess funds to be withdrawn by the City of London in charges from now to the time when most people will retire.
So, I don't see the benefit of this. I believe that this is the City simply saying.
“Share prices aren't high enough. We want them to go bigger. We want more money to flow into the market to achieve that outcome. We will get richer as a result. You will be able to claim this is growth, Rachel Reeves. Therefore, we, that tight community that she's talking to, plus Labour politicians, will be better off as a result and blow the rest of us.”
There's another reason why I don't trust those who are talking about pensions in those negotiations at present. And that is because what they're talking about is pensions as if they are solely financial products.
And they're not. They're nothing like that. The real implicit pension contract which exists in every society is that an older generation, people who, well, look like me, with hair my colour, should, by the time they reach my age, and I am now officially of retirement age, should have created sufficient capital assets for the generation that follows us to use in the course of their lives so that they can afford to give up some of their incomes to look after us in our old age.
How do they give up some of their incomes? Well, they pass over the benefit of some of the things that they produce to us, literally. The food that they produce, that those who are retired consume, the energy, the housing, and everything else that the elderly will consume, is made by younger people. They give that up to the older generation because the older generation have in turn created capital assets for them to use to produce those items which they don't effectively pay a return on.
Now this matters. That's a fundamental economic exchange. And yet we aren't honouring that within the financial products that we create, which we call pensions. The financial products that we create, which are called pensions, instead promote saving. Now saving is not the same as investment. I will say this until I am blue in the face on this channel, over years to come, if things go as I expect.
Because most people think that saving is investment, and it isn't. Saving is putting money into a bank account, or, in the case of the pension industry, almost invariably buying what I call secondhand assets.
What are secondhand assets? They are stocks and shares that are already in existence and have been issued by a company.
Or they are secondhand properties, which a pension fund decides to buy to collect rents from.
That is what pension companies actually invest in. Secondhand items.
It's a strange way to invest because no job is created as a result. No new economic activity arises apart from the collection of rents, in the pure economic meaning of that term, which means a payment without production arising.
And therefore, this activity extracts reward from society, and what is more saving in that way also takes money out of circulation in the economy in a way that depresses economic activity because it's not spent on consumption and therefore reduces growth. So, the whole process of saving for a pension in pure economic terms, if that saving goes into a financial product, is deeply negative as to its economic consequences.
What's required is a form of saving that links the funds which are put aside to the creation of new assets for use in the economy, which in turn will be passed to the next generation so that they may, as I previously explained, use them to look after the likes of me when I reach the point when I can no longer work, doing these videos or anything else. And that's what we need to do with our pension funds.
But that's not what they do. Almost no pension fund money - and there's six and a half trillion pounds worth of pension fund money in the UK - and that is roughly two and a half times our annual income. and therefore an enormous value of funds, the biggest part of financial wealth in this country as a whole - that money is not used in any sense creatively. And I don't think that any of the changes that Rachel Reeves is talking about is going to make any difference to that.
In fact, I'm quite sure they won't.
Why? Because she's simply talking about boosting the flow of funds into existing pension arrangements.
Now she's saying she might require those existing pension arrangements to buy new more shares in smaller companies. But even smaller companies don't use share capital to fund their investment activity. Most new money going into share capital in smaller companies is actually used to buy out existing owners or is part of a merger and acquisition activity, in other words. It isn't used to fund the creation of new assets for long-term use for the benefit of society. That's done by borrowing from banks. And banks don't use depositors' funds to make those loans, and therefore, again, there's no association between a pension fund and that new investment.
Unless those who are talking about changing the way in which our pension system works understand this fundamental pension contract between my generation - older people - and younger people who are going to forego their income to keep me when I am infirm, then they don't understand what they're talking about.
And that is deeply dangerous because the financial products they're creating will not fulfill the expectation that we in society have of them. And if that's the case, well, our pension system is going to remain not just pretty rubbish, but it's actually going to fail us in the end because we're forcing more and more people into it and there's no likelihood that the promise that it is creating will be fulfilled as things stand.
And, of course, I'm worried about that. Who wouldn't be?
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So you want every pound of pension fund money to fund new investment? If so you propose no secondhand market for equities. From this how does anybody realise any money from their investment? Without a second hand market in shares how does anybody attribute a value to their investments?
I have never said such things
I have suggested 25% be for new investment
Why do you trolls always make nonsense claims?
Perhaps one of your most important themes; not new but worth restating regularly.
This social contract has held in every society since the dawn of time but has been forgotten. Why?
It seems to me the rise of individualism over the last 40+ years is to blame and that money/financialization has obscured the issue. “Modern” folk seem to think that piling up gold bars (or equivalent) over a working life will ensure a comfortable old age. However, the things we REALLY need – personal care, meals, love – cannot be stored; accumulating gold bars only works if that gold can be exchanged for care/food/love when it is needed. At a micro level, storing gold is rational but it fails at a macro level. The common need of old people is “time” – they need time from younger people to care for them. Young people will only give that time if they have it – if they are not too busy trying to feed and shelter themselves and their children. At a micro level, lots of gold might allow you to outbid your neighbour but at a macro level no amount of gold will help if there are not enough younger folk with enough time to care.
So, rather than accumulating gold bars we, as a society, need to create stuff that will “free up” time for the generation that will look after us in old age.
Without understanding this we are destined to try and pile up more gold (to the great glee of the gold storage managers (ie. The City)) and still fail.
Thanks
Beautifully put.
Doesn’t occur to many people that we have evolved to be a predominantly prosocial species (not an individualist one like reptiles) who’ve discovered we can express caring through money and that we benefit enormously from this (healthcare and education for example). However, to do this successfully we need to coherently understand how a monetary system works best. This is currently missing in our Neoliberal societies for good reason the greedy overly individualist rich don’t want to be equitable in their payment of taxes despite the fact a vital component of making a money based system work is the redemption of money created.
HI Richard
I understand that the state pension is paid for out of the National Insurance Fund, and that is created up by NI contributions ( I am sure you will correct me if I have got this wrong). If so, this confirms a link across generations as I am currently paying to support those who have retired already. I also hope that when I retire, those working will continue to support the Fund to pay for my retirement.
In terms of a private pension, I save into one to pay for myself, in addition to my state pension. I have no idea how my private pension “invests”, but it does seem sensible that it could invest, along with others, in green energy infrastructure, or NHS infrastructure, or educational establishments. These would , of course, be used by others older than me, but also younger than me, thus linking generations, as you suggest?
And what about the NIF? If the Government is mandated to set it at a minimum level, and is able to top it up each year, would it not make sense to also invest it in a beneficial way?
Regards
The existence of the national insurance fund is now meaningless, as its accounts prove. NIC is just a tax that goes into a general pot to cancel the effects of government spending.
And like all government spending, pensions are paid out with newly created money. No NIC ever funds them, and there is no fund.
Pension funds are, however, real in the sense they hold sums deposited with them and these could be used for social investment, as I suggest.
And as an investor, how would I get a return on this investment in the NHS or Education.
And how would I be able to get my money back when I needed it, or wanted to invest in something else instead?
If you can’t work such things out you really should not hve been trusted withn money in the first place…
How about the government pays you interest on the funds you loan to it?
Or rent on the property you build for it?
Was it really so very hard to work out?
I’m sure you are clear about this, but I think the language is a bit confusing, in particular the unqualified use of the term “asset”. The productive people need REAL assets including physical infrastructure, transport, organisational/social structures, and energy production/distribution facilities to make the wheels go round. What are almost useless are most financial assets, although a limited amount of that is of course part of the way we organise the real assets. The term capital assets for a real asset is, I know, conventional but the lay person might well think it includes financial capital which of course I’m sure you don’t mean when you use the term “capital asset”.
Point noted
I will take more care
We already have a very large portfolio of fixed assets, everything from Hadrian’s Wall, to the Tyne Bridge and the Shard.
Now these are often written off to zero for business purposes
In public projects funding frequently ignores care and maintenance, as any pothole encountering driver will know. There are no obligations to provide sinking funds, and I frequently encountered undermanaged assets with zero maintenance budgets in projects management.
Now the sustenance of both social and private capital is essential for future environmentally sound capital management.
Add obsolescence and product failure as desirable for return market sales and there is massive waste built into the system. US CBD towers have an average life of 60yrs before redevelopment.
I’m far less concerned here with new investment via pension funds etc., pursuing the chimera of GDP growth, as changing the mindset to a fully circular economy.
Our resource consumption is wasteful currently and assets are needlessly degraded.
Property redevelopment is highly profitable, whereas building fabric maintenance and conservation a weak link, given property speculation.
At a materials level, the high embodied energy in glass alone ought to make its repurposing, essential, and dumping extremely heavily taxed.
In environmental terms, the care and maintenance of capital is easily as important as “new” investment, and such portfolios essential in any net zero transition.
How this is valued and factored in, can only follow the acceptance of a different approach to thinking about economic development.
Although not widely known, it is entirely possible to hold NS&I Income Bonds in a private pension. Such a ‘deposit administration SIPP’ can hold up to £1m in these, which does not impact any non-pension personal holdings of other NS&I products (as they are ‘owned’ by the pension scheme trustees). Because the administration of such a pension is straightforward, one might expect to pay an annual fee of around £250+VAT as a fixed charge regardless of the fund size – no ‘ad valorem’ percentage deductions. There would be a modest establishment charge, but not very much. I often find people are paying 1.70%-2.50% (and more) in pension fees, which is entirely unnecessary, if one knows where to look.
We have several clients who hold NS&I Income Bonds as their sole pension ‘investment’ and they currently obtain 4% gross interest.
Of course, this isn’t necessarily the right way to invest for all, but I happen to think that the security such an approach offers is attractive for those approaching or in ‘retirement’. Most IFA’s will not promote this approach to pension saving as they can’t charge large ongoing fees for appearing to be ‘clever’ with capital at risk investment funds. I’m not arguing against such investment, per se, but the NS&I option needs to be better understood.
A very simple, economical, approach to private pension saving and cheap funding for HMG?
Interesting idea…
Hi Richard
How do other European countries manage to provide much better state pensions? Is it simply that their citizens contribute more? I suspect that if the state pension was at European levels then there would be much less demand for private pensions and the City would lose out. Could that help to explain our inadequate state pension?
Better funded
Greater social cohesion
And in the case of private pensions, vastly lower fees e.g. see the Netherlands
I’m not entirely convinced that pensions are higher elsewhere in Europe because it is hard to compare like for like. For example, the French state pension is £1,253 a month as opposed to £956 in the UK, which is obviously a lot of difference. But a UK pensioner with no other source of income, and savings of less than £16,500 (I think without checking), is entitled to apply for Housing benefit, which could cover the whole of their rent, especially if it is paid to a Housing Association. It even covers the service charge. In France, as far as I can make out, it is £141 a month irrespective of the actual rent paid. There is also, of course, Pension Credit and Guarantee Credit in the UK, receipt of which triggers other benefits such as HC2 and cover for mortgage interest.
I quoted oecd data
I guess they gave their reasons…