Beware Britain’s pensions grab

jeremy hunt
jeremy hunt

It’s 2033, and your smart TV flickers back to life after yet another power cut. And up pops that annoying advert: “Have you been the victim of a pension investment that went wrong? Has your nest egg vanished? Our friendly and knowledgeable team of lawyers is here to help”.

This is a nightmare that becomes more plausible every day.

The pension system is going to be tweaked, and the logic behind it goes like this. Today, there are huge piles of cash lying around that are poorly used. At the same time, there are worthy and exciting new companies in need of money. So let’s just move some of that money towards the new companies. It sounds lovely. When we’re told it will help Britain’s economy, then who could possibly object?

Well, you might one day, when you discover that the pool of money you were relying on for your retirement has disappeared.

Jeremy Hunt began the process in his Mansion House speech in July.

“We have a perverse situation in which UK institutional investors are not investing as much in UK high-growth companies as their international counterparts,” Hunt explained.

He has since secured the agreement of nine of the biggest defined contribution pension providers to direct 5pc of their default funds to unlisted companies by 2030.

If that didn’t sound the alarm bell, then perhaps a new report by think tank Onward last week might. So-called pension power was intended to put some lead in the Chancellor’s pencil.

“The UK has had a pensions investment problem for too long,” Onward’s report begins, citing chancellor Gordon Brown’s 2000 Budget speech in which he said: “Britain as a whole has lagged behind America in business access to venture capital (VC) investment.”

With his next breath, Brown announced the Myners Review.  However, his speech was delivered on March 10 and what happened next? Let Time magazine explain:  “The crash began March 11. In less than a month, nearly a trillion dollars worth of stock value had completely evaporated. Stocks sunk. Companies folded. Fortunes were lost, and the American economy started to slip down a slow mudslide that would end up in full-on recession.”

By the time Myners reported back a year later, the idea that we could trust the architects of the dotcom bubble with our nest eggs was preposterous.

Did the VC sector emerge from the crash more sober and reflective? You must be joking. When interest rates fell to zero, funds were inflated by desperate investors. And so the firms created ever more implausible and reckless fads: the “sharing economy”, blockchain, Web3, and crypto finance, to name a few.

The young policy cadres of SW1 have a startling lack of curiosity about recent history. Onward also complains that “less than half of Britain’s most innovative firms reach their second funding round, compared to 63pc of American ones”.

And yet there may be good reasons for this. Perhaps we generate far fewer viable companies worth investing in. Or perhaps we have a more promiscuous VC culture. The tax system incentivises people to dabble, providing some initial seed funding, but far fewer go further into Series A rounds. Whatever the reason, none of this is really a problem for the pension industry, which exists to serve its customers, and should decide how best to do it.

Nor should pensions professionals be corralled into fixing someone else’s problems, if that is what they are. Fund managers already operate in one of the most sophisticated and intricate systems humans have ever created, negotiating regulations with the agility of Tom Cruise dangling from a trapeze.

They’re generally conscientious people. If Britain has a deficit of buccaneering speculators, perhaps we could find them from somewhere else.

And for his part, if Hunt’s wish is to stimulate capital investment in small and midcap UK companies, he has many other tools at his disposal for doing that – from reforming capital gains tax and dividends to an investment ISA, and cutting tax burdens.

Herein lies the problem. Few obstacles today lie in the way of a young professional who wants to risk some money on dicier investments. The problem starts when the state starts pressuring the pension sector to do so, too. The state is a very poor investor and a sinister director of capital from behind the curtain.

From the experience of the past decade, we know that terrible business ideas love easy money, for no one else will give them the time of day.

Which means the state is simply making it easier to fund bad ideas. And this will likely get much worse after the next general election.

“Labour would go further, encouraging investment into British start-up and scale-up firms,” shadow chancellor Rachel Reeves vowed in her response to Hunt’s Autumn Statement.

Of course. No doubt Ed Miliband has a long list of subsidy-seeking green “innovators” that could soak up those pension pots, with products that won’t ever be viable without even more state aid.

“I look forward to my pension funding the next Theranos or FTX because some pension fund manager thinks they sound cool,” one saver commented on Reddit after the Mansion House scheme was announced.

It’s actually more likely to be a hydrogen or carbon capture start-up, but the point is well made. We’ve been warned.

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