Britain’s Chancellor of the Exchequer Rachel Reeves chairs a meeting of the National Wealth Fund … [+]
One of the first actions of the new government of UK Prime Minister Keir Starmer and his Chancellor of the Exchequer Rachel Reeves, has been to establish the National Wealth Fund with almost $10 billion to “invest in the new industries of the future.”
$10 billion is small by sovereign wealth fund standards – by comparison, the largest sovereign wealth funds range from China’s CIC at $2.75 trillion to South Korean KIC at about $200 billion, with other notable funds in Singapore, UAE, Norway, Saudi Arabia, Kuwait, Hong Kong, Qatar, and Australia. Nevertheless, it’s an interesting start of a broader push by the new Labour government to focus on building the investment sector in the UK in the coming years.
Sovereign wealth funds are major players in the global capital markets. According to the International Forum of Sovereign Wealth Funds, the key characteristics of a sovereign wealth fund are that it is owned by the general government, includes investments in foreign financial assets, and that it invests for financial objectives.
Sovereign wealth funds ensure that national wealth is preserved and utilized for the benefit of future generations, promoting sustainable economic development. Additionally, the funds can be used to invest in large-scale infrastructure projects, enhancing public services and boosting economic productivity – one of Reeves’ stated goals for the fund.
Throughout history, countries that have amassed this sort of wealth have been able to make the rules and prosper under them. In today’s global capital markets, countries with such large funds are certainly influential. This begs the question: why do some countries have sovereign wealth funds and others don’t?
The most obvious answer is that countries with revenues from a specific commodity or resource – like oil – need to grow that revenue over time for future generations as those resources are depleted; or they have benefited from a global trade boom and smartly are saving that money away for a rainy day. This isn’t the case for many countries including the United States.
For the United States in particular, there are several additional reasons for the lack of a sovereign wealth fund. The most apparent is the lack of a budget surplus, which the US hasn’t had for decades. Another reason is that the challenges with funding the Social Security system seem more urgent. Several states do in fact have their own smaller funds. For example, the Alaska Permanent Fund is in charge of the state’s revenue from oil, and the Texas Permanent School Fund supports the state’s public schools.
The United States also has other mechanisms for long-term investment that a sovereign wealth fund would typically provide. The Federal Reserve and the U.S. Treasury manage economic stability, foreign reserves, and fiscal policy without the need for a separate sovereign wealth fund. And the American investment sector is highly developed to the point that that various investment managers and private equity firms manage large pools of capital like those of sovereign wealth funds.
Alternatively, the US has leaned much more heavily on individual savings – and its pension plans are organized at the local or employer level rather than consolidating them at the national, state, or industry level as is common in other countries. Approximately 35% of working-age Americans have a 401(k)-style retirement account. This figure reflects a broader trend where fewer than half of American households have any form of retirement savings. But the scale of individual investments is enormous, totaling $107 trillion in 2023. Given the American approach to investing and the sheer scale of invested assets, are there options to create large pools of long-term capital that would benefit citizens more broadly, like a sovereign wealth fund does?
Australia provides a multi-faceted model that fits the US culture of individualism and competition.
First, Australia has the Future Fund, a sovereign fund established in 2006 which invests for future generations of Australians, medical research, and potential droughts or disasters. The Future Fund is professionally managed and operates outside of the government so that it can keep its long-term focus through election cycles.
Second, Australia has a system known as superannuation funds, which are very large funds made up of individual retirement accounts. Under this system, employers must contribute a percentage of an employee’s earnings into their individual “super account.” The system applies to most full-time, part-time, and casual workers, as well as some contractors. Individuals have the right to choose from an assortment of providers and investment approaches to manage their super account. These accounts belong to the individual and are not administered by employers, so individuals retain and grow these accounts even as they change jobs throughout their careers. These funds have some of the lowest fees and best returns in the world because they combine a long-term time frame, economies of scale, and competition.
While it would be challenging for the US to create a sovereign wealth fund, it could convert the 401(k) system to an individual-centered rather than employer-administered retirement system. Creating a “super” system in the US could provide a long-term source of capital for innovation and growth and broaden participation in the wealth creation of the capital markets.
The establishment of the National Wealth Fund marks a significant step for the UK to invest in future industries, despite its modest size compared to global peers. There is a pathway for the US to follow suit while keeping the individualism, choice, and competition that characterize other parts of its economy, while creating the scale of investing that countries with national pension funds or sovereign wealth funds enjoy.
