Mandating investment lays bare the Chancellor’s failures
As Latin American countries began to allow for the creation of private pensions in the 1980s and 1990s, they faced a new dilemma on how to maximise domestic investment by these new funds.
While they initially opted for a policy of strict capital controls and limits on overseas investments, everyone has to face economic reality eventually. So gradually in more recent decades, these countries have slowly opened up their markets. While many still maintain domestic investment minimums, they are at least moving in the right direction by allowing their pension funds to invest overseas to increase diversification and maximise returns for savers.
In Britain, of course, we had our own experience of capital controls until 1979. In one of her first acts as Prime Minister, Margaret Thatcher abolished them all together, including the limitation on Britons purchasing foreign equities.
Until recently, to suggest that Britain would re-establish such measures would have been laughable. The issue of how to maximise investment into domestic businesses and infrastructure remains, but a consensus was formed that mandating was not the way.
Worryingly, in recent days it has been suggested that the Chancellor may return Britain to these days of capital controls, moving us towards the policy of South American socialist governments by mandating a minimum commitment by UK pension funds to domestic assets.
Should she take this step, it would represent perhaps the most significant direct intervention by thegovernment in the UK pension and wider investment market for decades.
The previous government was always clear that investment mandates are not right. For example, the former Chancellor, Sir Jeremy Hunt MP, negotiated the Mansion House Compact with many of our largest pension funds, aimed at boosting growth by voluntarily pledging a minimum five per cent of their default funds into unlisted equities by 2030.
The Chancellor is reportedly looking to build on this, wanting to unveil a 10 per cent minimum pledge by the summer. However, perhaps in a sign of her desperation for any measure to boost growth, we know that the Treasury has threatened to go further should funds not comply.
Now let’s be clear why we’re in this position. The economic policy pursued so far by the Chancellor is one that has so clearly damaged the British economy and its future prospects. She is raising the cost base for businesses starting this month. The government’s national insurance hike hits employers across all sectors with a Jobs Tax worth some £25bn. The incoming loosening trade union and employment law relentlessly pursued by the Deputy Prime Minister, Angela Rayner MP, will not only hit our public services, but strangle private businesses in £5bn of red tape.
Fund managers have a fiduciary responsibility towards those savers who entrust them with the savings they have put aside for security in later life. If the Chancellor decides to go down the route of mandating investments, it will be because her poor choices mean she needs to shake down pension funds and funnel your money towards UK-based investments that her economic policies have done so much to make unattractive.
Instead we should be tackling the underlying issues that our country faces, not limiting the future prosperity of people who have worked hard to save for a pension.
We need a greater risk appetite in this country, one where entrepreneurs aren’t afraid to fail and where investors are willing to responsibly back them to grow further when they succeed.
We need to build on the excellent work of the previous government when it comes to pension fund consolidation. For too long, British companies have had to relocate abroad, particularly to the United States, in search of deeper pools of capital when we can take sensible steps to facilitate that here.
The Chancellor should not be looking to Latin America’s past for the future of the British pension market. In recent decades, these countries have begun to learn the hard way – whereas our Chancellor is hardly learning.
Gareth Davies Shadow is financial secretary to the Treasury