Actuarial

UK government looks to pensions to fuel “investment big bang”

By - World Infrastructure Journal

UK government looks to pensions to fuel “investment big bang”

Looking to inject more cash into the ongoing efforts to “level up” British infrastructure, the UK government has asked pensions to invest more heavily. By doing so, however, the UK is exposing pensioners to undue risk – and ignoring a much more sensible way to get money into its coffers.


In an unprecedented move, Prime Minister Boris Johnson and Chancellor Rishi Sunak published a letter to the pension industry, asking for greater investment into sectors such as infrastructure. The hope is to create an “investment big bang” that will set the foundation for the UK’s attempt to “build back better,” however many pensions are sceptical. “Suggestions that trustees should favour UK opportunities to help us ‘build back better’ get short shrift from me,” quoted Andrew Warwick-Thompson, a trustee with Capital Cranfield. “UK illiquids will have to stand up to the same due diligence process as any other investment decision. ”

Pensions are generally sceptical of private projects, particularly those that revolve around infrastructure. This is because, beyond the high fees, these projects usually have rather poor liquidity – which is less than ideal for a financial scheme that gains investment by promising timely payouts. As such, while the funds have more than £1 trillion in combined assets, they are not in a position to take on the sort of risk that supporting major infrastructure projects entails.

In fact, according to Sir John Kay (the economist who led the 2012 independent review into UK equity market reform measures), large infrastructure projects are “terrible financial investments for individual retirement savers and such projects are really only attractive to large institutional investors because the government and consumers will have to put up a lot of cash to subside them. ” As such, “it is not clear that pension schemes provide the answer to the funding needs of new national projects.


So where should the funding come from then? There is a case to be made for the UK continuing its efforts to drum up investment from abroad – however, given that projects to “build back better” are being undertaken at a global scale, this may prove difficult. A much stronger case, as such, could be made for this being a job for the newly formed UK Infrastructure Bank (UKIB). Designed to help channel money into big projects and address the climate crisis in every region and nation of the UK, the UKIB would appear to be the ideal institution to step up and support an “investment big bang. ” The only issue is that the UKIB currently doesn’t have much money.

The UKIB is due to receive an initial £12 billion of capital and £10 billion of government guarantees, and the aim currently is to secure and additional £40 billion from private investors. While this may seem like a large amount, it is worthwhile to consider that the earnings before interest and taxes (EBIT) of the BPI Groupe S.A. (France’s largest public investment bank) were around £872 billion in 2018. While there is a commitment to spend at least £100 billion on capital expenditure, there is no date set for when that money needs to be spent – and already firms such as Network Rail have been told they will receive no additional funding from the bank.


As such, the UKIB’s lack of support is why Chancellor of the Exchequer Rishi Sunak is demanding so much of pension schemes. If the burden of assuming the necessary financial risk to “build back better” is to be shifted, then, it will only be as a result of the bank receiving the necessary financial backing. But where does that money come from?

In 2019 the official reported tax gap (meaning the amount of tax owed to the government that was not paid) was £31 billion. This was a rather conservative estimation as tax campaigner Richard Murphy, amongst others, has suggested that figure was closer to £90 billion. As such, a more stringent enforcement of tax law would, already, go a long way towards providing the regular financial support needed to make sure the UKIB can fulfil its purpose. Even more support, however, could be brought in were the UK to reintroduce a wealth tax.

A December 2020 report by the London School of Economics Wealth Tax Commission claimed that a 5 per cent tax on housing, pension, business, equity, and savings wealth (for those with assets exceeding £500,000) would raise roughly £260 billion. While this proposal was intended to be a one-time levy to cover the now £372 billion that has been spent in the UK’s COVID-19 relief efforts, a more reasonable 1-2 per cent wealth tax has already been proven to effective in countries such as Norway, Switzerland, and the Netherlands. For instance, instituting a flat wealth tax of 1.0 per cent for individuals with assets exceeding £1 million could generate an additional tax income of £32 billion annually if instituted now.


While the institution of a wealth tax may seem rather radical to some, the reality is that it’s a much more feasible (and palatable) solution to the government’s money woes than its current plan of just asking pensioners to expose themselves to greater financial risk. Moreover, by gaining the capital from a previously untapped source, the UK government would not have to sacrifice ongoing investment into other UK industries in order to kickstart its infrastructure ambitions if it wear to adopt a wealth tax.

It’s unlikely to happen, as the Chancellor already declared in January of this year that a one-time wealth tax would be “un-Conservative. ” However, it is also unlikely that the trustees of pension funds will expose their clients to undue risk simply because the UK government has asked them to. And yes, claiming tax from wealthy individuals and large corporations (who will likely take every step to avoid paying their fair share) will be a difficult process that will have to be carefully managed. That said, the complexity and precariousness of that task is still preferable to the alternative of exposing millions of pensioners to serious financial risk.


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