I was on LBC this morning talking about pensions in the light of a Rachel Reeves media onslaught on the subject scheduled for this morning.
The Press Association summarised this in a press release as follows:
The Chancellor hopes to boost pension pots by £11,000 and unlock billions more in investment with a review of retirement savings.
With pension schemes expected to manage about £800 billion by 2030, the review will look at how they can be encouraged to invest in productive assets such as infrastructure.
As well as supporting the Government's aim of boosting economic growth, the Treasury said this would also ensure better returns for savers, increasing the average pension pot by more than £11,000.The announcement follows the inclusion of a Pension Schemes Bill in Wednesday's King's Speech, to help savers by introducing automatic consolidation of small pension pots and a value-for-money framework to improve governance.
This is all, apparently, to be delivered by yet another Labour task force (they are arriving thick and fast).
I think we can safely predict what the pension industry will demand. This comes from the FT, yesterday:
City grandees have urged Rachel Reeves to tackle the “impending crisis” facing British retirees because of a lack of long-term savings, following warnings the King's Speech missed an opportunity to raise workplace pension contributions.
In a letter seen by the Financial Times, eight financial services veterans told the chancellor that Britons were not saving enough in workplace schemes to ensure a sufficient retirement pot.
The signatories …. urged Reeves to prioritise lifting “substantially” the rate of long-term savings for workers in “auto-enrolled” pension schemes.
As I said on air, this approach would be disastrous, but let me expand on that.
As I have said time and again on this blog, the only thing savings do in the macroeconomy is withdraw funds from active use within it. In other words, they are inherently deflationary in withdrawing funds from the economy, reducing growth as a result. By their very nature, they deliver the the opposite of the growth agenda Rachel Reeves is seeking to pursue. I wonder if she knows that?
There is also absolutely no guarantee that savings will result in investment. I am sure that Rachel Reeves was taught at university that:
S = I
Where:
S = savings
and
I = investment
This is a formula that might just work in the barter style economy that macroeconomics believes exists. It does not hold true in the real world where there is money, which money macroeconomic theory very largely ignores which is why it is so hopelessly wrong most of the time.
In the real world savings are of three broad types:
- Cash, which as we know is usually held in a bank, where they might provide a form of risk capital to the bank itself but where the sums deposited are never used to fund loans to bank customers, because that is a technical impossibility. So, this form of saving never boosts investment.
- In second hand assets. This is where pension funds and most marketed savings schemes place their money.They buy second-hand shares in companies or they buy second-hand properties. They might also buy some corporate bonds, but not necessarily new ones. In that case this form of saving provides liquidity to the financial markets, and a big opportunity for them to take a rake off from dealing fees, but it provides precisely no new money at all for investment.
- Third, there is saving used to fund actual investment. There is remarkable little of this. That is partly because actual investment in the UK is low, bit also because the vast majority of what investment actually takes place is funded by loans from banks, which term I use to embrace both commercial and investment banks. And, as previously noted, they do not need savings to fund this investment.
There is, I should add, government investment. This is funded by bonds issued to the markets: this is one of the rare occasions when the link between the market purchase of an asset (a government bond) and the act of saving has any direct relationship with investment, at all. In all other cases, the reality is that there is little or no link.
Looking at what Rachel Reeves and the City (and let's assume they will eventually walk in step) want, the following goals becomes clear:
- More saving, which as far as the City is concerned is required to:
- Boost asset prices
- Boost City trading incomes
- Increase City fees
- Increase pension fund values short term by artificially inflating prices by having more, compulsorily subscribed, money chasing a fixed amount of existing assets, which will always increase prices
- Asset price inflation, which as far as Rachel Reeves is concerned:
- Boosts short term confidence
- Makes pensioners feel they might have a better future
- Makes the City happy
- Guarantees her future employment
- Persuades the electorate to vote Labour again
In other words, there is a conceit in here to inflate asset prices.
There is no plan to actually invest more.
That said, there is an implicit demand in what Rachel Reeves is saying to allocate more funding to things like private equity funds, which do highly speculative deal making in the shares of smaller companies. Many of these funds provide remarkably little capital to the companies that they deal with. If they do, the price extracted is enormous, and the pressure within the companies to whom they provide money then moves from investment for growth to grooming for sale, because these funds always want a quick turnaround on their money. They are an appalling mechanism for funding British business, and are usually deeply destructive in reinforcing our negative, short term, financial engineering culture. The only people they add value to are the private equity fund managers, who are (in fairness) quite blatant about that goal.
So, what we have is a three pronged attack which says:
- People on low pay should be forced to pay more into pensions
- The City should gain as a result because asset prices will be hiked, which will con people into thinking they are better off when that will almost certainly not be the case.
- Private equity will have more money to play with and Rachel Reeves will call that investment.
In reality this will happen:
- Taxes will effectively rise, because an increase in what are, for most people, compulsory pension contributions feels like a tax increase by any other name.
- There will be little or no new actual investment.
- An asset price bubble will be created which will eventually burst.
- The government will say that investment is increasing without it having to raise tax or borrow to do so, but the social value (if any) of that investment will be unknown and our futures will be left more perilous as a result.
- People will have been conned.
- We will be no more ready to tackle the real issues in society, like climate change and the demand for change that it creates.
- And vital public infrastructure investment would have been outsourced, probably at very high cost, if it happens at all.
That is a deeply depressing scenario. But it seems to me that this is exactly what is happening. A financial disaster is being created in front of our eyes with Labour seeking to abuse pension funds to increase the profits if the City of London, which increase it will call growth.
Will pensioners benefit from this? Not one iota.
Welcome to the Labour pension con-trick, coming your way at considerable increased cost to your pocket, very soon.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
The Press Association release says the government is going to try and do two things.
First, channel savings into productive assets like infrastructure – which is a good thing (although I do have concerns about how this gets structured… PFI MkII scares me). This is something you have long argued for.
Second, restructure the pension industry to reduce fees to give better pension pots to retirees – also a good thing…. and something I am sure you approve of.
Will they succeed? Who knows.
The second quote is entirely predictable… pigs asking for their troughs to be kept full. The real issue is whether Labour caves into these “demands”…. and the point about fees being reduced suggests they do recognise the City as part of the problem.
Your macro economic point about raising contribution rates is correct. I do fear that the “micro mindset” of “savings = good” might confuse the current government… I hope not.
Well they have the mindset of “savings=good” except when it comes to government ”borrowing” when suddenly “savings=bad”.
Agreed
“which money macroeconomic theory very largely ignores which is why it is so hopelessly writing most of the time.”
“writing” should be “wrong” there, I think. Plus ‘money macroeconomic’ theory should maybe be reversed in order?
Writing corrected
The second reflects what I meant
This is exactly what I was thinking this morning after reading the Observer.
In another life Richard, you would be the editor of hard hitting national daily. This is the REAL news. Which I why I keep reading.
Because those who govern us are incapable of understanding the use and benefit of government money, all that can happen is that the existing money supply is plundered (again!) instead because as you say there is very little (if any) ‘new money’ in any of these proposals.
I was watching a documentary about preparations for the Olympics yesterday and it was clear that we would not be able to field an effective team with out the national lottery.
The national lottery seems to be nothing more that a populist form of taxation – with projects paid for or in part by the man and women in the street and not the government but which garner international acclaim and prestige for the country and the government alike judging by how our politicians like to be seen associated with sporting success they effectively under fund and which we the people make up the shortfall.
You’d think a government would put up the cash for that wouldn’t you? But no, ordinary people are paying for those gold medals, it seems.
In a similar vein, in Labour’s plans to ‘regenerate the economy’ ordinary people’s money will be used once again but with very dubious outcomes.
What sort of unprincipled, uncouth, sick minded people do we have in politics at the moment? These are the actions of people who are not part of society. Who are passing the buck at high personal gain onto the people of this country. This is not government, it’s something else, more like a game? Or just idleness? LINO were too busy undermining Corbyn to fight the Tories in parliament and we’ve ended up with a right mess that they don’t seem to want to deal with at all. They just want to tip toe around it. Obviously modern politicians DO look beyond their term of office – do their time at Westminster – and then make lots of money afterwards (thank you Aurelien). That’s the only explanation. I’m glad I did not vote for this.
The only other thing I would add is about risk. I’m no expert so forgive me if the comment is unnecessary – but what are the risks to these pension funds – will Reeve ensure that the funds are safe, given the poor regulation of business in the country?
I cannot see much risk for business either, if the money is not coming from their own inflated bank accounts or those of their investors.
The other issue is that it is clear to me that privatisation is driven by the opportunity to charge for services (healthcare to passports) by market knowledge on savings (TESSAs maybe) and pensions. To the market, and market loving LINO, that money is sitting there waiting just to be exploited and added to the GDP and other ‘health’ metrices for the economy.
But we also know that the distribution of savings and pension pots is so unequal – so what about those without savings and lower pensions? How will it affect them? I don’t think LINO has a clue about that or even cares.
‘Con’ is a most apt description. Making money out of money that has already been made just re-distributes money upwards – it does not create more money which is what we need. That, simply put, is new money, (real) investment.
It is very simple and Labour does not get it. Money has been taken out of the economy for 14 years (austerity, BREXIT, Covid). It just needs putting back. What is so difficult to understand about that? Or is it me that is stupid?
Even the urbane Bill Keegan agrees:
https://www.theguardian.com/business/article/2024/jul/21/a-respectful-question-for-labour-do-you-have-any-real-change
Thanks
From the FT as you quoted:
“the “impending crisis” facing British retirees because of a lack of long-term savings”
More of Thatcher’s “What collective society? It’s all personal now,” disaster.
The idea of social good from a) working, and b) retiring when one can no longer work was dropped from the social contract long ago, but the underlying balance is, I believe, important. If the generic *you* is concerned with the “debt/deficit” for *your* grandchildren, then what are *you* doing for my grandchildren?
Q: Why does a retiree need savings?
A: Because the State Pension isn’t deemed enough to fund retirement.
Q: How do you build up savings?
A: You stop spending money, which is the current measure of the economy (GDP).
Q: Why is the State Pension not deemed enough to fund retirement?
A: Because the economy is stagnant – not enough people buying goods and services, and there’s not enough labour to purchase because people with savings are retiring early and living on their (eked-out) savings. Output does not match the minimum needed to match inflation.
Pay a decent pension – how about the National Living Wage, it’s said to be sufficient [*] for those in work – and treat any savings as any normal savings fund. Drop all the credits and reliefs and restrictions on withdrawal “because they’re pension funds”, they’d be simply “deferred spending accounts”. And the government can afford it, as we know.
[*] “sufficient” used advisedly. Some of the older generations (mine included) might think twice before criticising (a-hem) “lifestyle choices” if they had to live on the NLW.
Thanks
Will Hutton doesnt seem to be asking about the ‘asset price inflation vs productive investment in the real economy’ point
https://www.theguardian.com/commentisfree/article/2024/jul/21/pension-reform-investment-boom-stock-market-britain?CMP=Share_iOSApp_Other
A grim article by someone else who thinks saving automatically means investment. How, I do not know
“They buy second-hand shares in companies … but it provides precisely no new money at all for investment”
Except it does. The third group invests in start-ups, then once they’re established sells them to the more cautious second group, and reinvests the money in new start-ups. They wouldn’t invest anything like so much in higher-risk start-ups if there wasn’t an exit route.
Now tell me how many start ups have shares bought by pension funds!
For all practical purposes the answer is none
So what is this gibberish you are suggesting happens?
Imagine for a second that I set up a new Pension Fund explicitly designed only to invest in genuine investments that furthered a Just Transition and that were conducted ethically from a human rights point of view.
That Pension Fund attracts money from public sector pension schemes initially and buys bonds in a new Green Investment Bank that has been set up with similar investment priorities. It may create money through loans but it requires some level of capitalisation to remain nominally liquid. Nevertheless it would be able to invest N £s for every £ it sold in bonds to the new Pension Fund.
It might invest through making loans to intermediaries specialising in making the sort of speculative and risky investments that do genuinely create growth and that has similar ethical restrictions on how it behaves.
How could that structure be improved and what possibilities might it offer?
You tell me
You imagined this
Well that £800Bn you were talking about lying about in pension funds that are not really making any productive contribution to our society might be transformed into several £Tn of direct investment into the mission of transforming our economy. Building out the green infrastructure that we need and developing the myriad new industries that we haven’t even imagined yet.
Much of the profit from that revolution could be recycled back through the same system that created it and fund the thriving, mature economy that we need for long term sustainability.
There might even be a risk of generating enough wealth to pay back some of the debts we owe to the developing countries we have asset stripped down through the centuries and then left to cope with the effects of climate change they didn’t cause…
I did not mention £800bn
Nor did I ask for several trillion of investment
Are you just making stuff up?
“With pension schemes expected to manage about £800 billion by 2030, the review will look at how they can be encouraged to invest in productive assets such as infrastructure.”
Right now, as I noted, the correct figure is £6,445 billion.
So, tell me, what are you talking about? Explain your position since you are new here.
Sorry, I must have missed that in the text above.
I’m suggesting that the failure of the entities that you are talking about to make actual investments in economic growth is partially down to their structure and governing principles.
There is nothing stopping us creating different types of investment vehicles with different priorities that would be able to direct the “savings” in pension funds into actual investments in sustainable economic growth.
Theoretically investing those “savings” in that manner ought to be massively more profitable than the speculative roundabout they are presently invested in. The present system merely creates inequity, asset bubbles, and market instability and little or no economic growth. And certainly not growth that is in any way sustainable.
Ok, thanks
Excuse my wariness: I was unsure as to whether you were genuine or setting an attempted troll trap