Jeremy Hunt’s Mansion House speech in early July outlined some truly terrible ideas for pensions.
Some very optimistic projections show the average pensioner will be £1,000 a year better off in retirement by investing 5% of their pension in unlisted, start-up UK companies, roughly a 5x increase from the current position.
This is a terrible idea that conveniently overlooks lots of negative factors.
If Jeremy Hunt wants to encourage investment into UK companies he should instead scrap the 0.5% stamp duty on share purchases or, even better, reverse Gordon Brown’s tax raid on dividends.
To find out how this affects Tony Blair, the staff at Mrs Miggins’ pie shop, and whether it affects you or not, watch my short video here.
For a transcript of the video, keep reading:
In this video, I’m going to tell you about Jeremy Hunt’s latest cutting plan for pensions, which in short, I think of terrible, terrible ideas.
The UK pension assets are worth about two and a half trillion pounds. They’re the biggest in Europe, and successive governments seem to not be able to help themselves but tinker with the rules and regulations tax and they just see pensions as low hanging fruit to be pilfered, frankly.
So here’s Jeremy giving his speech at the Mansion House in July, when the headlines were made were that the average pension that he’s going to be £1,000 a year better off in retirement. This £1,000 a year was entirely driven by increasing the returns on the pension fund by having the pensions themselves invest from a current position of 1% in unlisted small UK start-up companies to five percent. So from one to 5% from and is a huge increase and it was based on some really optimistic assumptions on the investment returns of those unlisted companies and unlisted companies are risky. The Treasury clearly knows that and I just think they’ve really overlooked the risks that go with such investments.
So Jeremy’s genius idea is to get pension fund trustees to invest a fivefold increase in assets that with complete freedom they have till now largely avoid.
The other thing to point out that is this is largely going to affect people in final salary, pensions and company pension schemes, so auto enrolment group personal pensions, and this is going to apply to the default investment choice within those company pension schemes. So if you’ve got a Transact pension, an AJ Bell pension or any other pension that Chatfield have recommended, this really isn’t going to affect you, but it is going to affect a lot of people out there.
And this I think is what Jeremy is fighting against. The amount of money in equities in the UK pension schemes has really dropped in the last 25 to 30 years and the amount in bonds has correspondingly increased. And that’s entirely down to the successive governments rules and regulations that they’ve introduced. So to have let’s say for argument’s sake this chart carries on at 6% in UK equities and then 5% in unlisted UK equities is just completely out of balance.
And I think it’s a real shame that pension schemes have got so little in equities because they’re really limiting their long-term growth from doing so.
This idea started, strangely enough, with the Tony Blair Institute for Global Change earlier this year. There’s the paper itself. It was written by three people who were the founders of Ondra Partners, which is a boutique investment bank in London and Paris. I smell a rat here and I think Ondra Partners would profit handsomely if any of their proposals actually came to fruition.
Now, some of the other proposals in here that I really didn’t like the look of are that they’re suggesting that tax benefits that pension schemes enjoy should be reliant on getting to this 5% threshold. And I just think they’re looking through the wrong end of the telescope. They should be making the UK a more attractive place to invest. And if you want to do that, remove the half percent stamp duty buying UK shares or if you’re going to be really bold, change the taxation of dividends in the pension schemes. Those two would make a huge difference.
The private equity world is sat on enormous amounts of cash are waiting for the right opportunity, it’s not waiting for government encouragement. And also this 5% is not going to come out of thin air as the existing assets will have to be sold. Who’s going to buy those to then have the cash to go out and spend on these wonderful unlisted UK companies and investing in unlisted companies give me flashbacks to this man, Neil Woodford, whose downfall was almost entirely down to having too much in unlisted small UK companies.
And just imagine, here, Mrs. Miggins and her pie shop. She has, in good faith, set up a pension schemes for her staff. Would they really want 5% of all their contributions for their entire working life invested in unlisted small UK start-up companies. I couldn’t recommend that. I would be pulled in front of the regulator if I recommended something as risky as that I just think it’s far too risky.
And Jeremy Hunt needs to realise that if he wants pensioners to be £1,000 a year better off in retirement, the best thing they could probably do is start contributing their pensions earlier and invest at lower charges.
The other irony is that the MPs own pension scheme has about 12% invested in UK equities and I would love to know how much of that is in unlisted UK equities and how they think that’s going to change over the next few years as well.
So in short, Jeremy, I really don’t like it. Don’t take it any further.