As far as Hunt is concerned this is a win-win proposition. Private equity has a long history of outperforming public markets so the idea is, we will make more money and have better retirements – just like the Australians, who currently invest 10 times more than we do in private equity via their pension programs (4.9% of their total assets at last count). That’s good. But even better is the fact that all this money — estimated to be around £50 billion – will be pouring into the kind of growth companies that will then boost the UK economy as a whole. It might be expensive – private equity fees are very high (too high), but Hunt says this isn’t the point. Returns are the point – and if you get them the upfront cost doesn’t matter. It’s about the value you get, not the price you pay. In this case, you get innovative growth and superior returns. What could possibly go wrong?
We should start with past performance. Private equity has had phenomenal success the last 40 years. The likes of Hunt seem to think that this has been based on a special – and permanent – kind of clever-person magic. That’s not so. It looks to have been more the result of circumstance: a world of constantly falling interest rates, easy money, a very favorable tax environment and a dollop of regulatory arbitrage.
That world is gone. The summary of all this on the government’s website says not that its plans might, or could, increase pension pots by 12% but that they “will” do so. That’s a very brave statement.
Next up, the boost. This is all expected to be good for the UK economy. But oddly there is no obligation for the investments to go into British companies. Note that our defined-contribution pension funds have already made their feelings on UK-listed equities clear. Look at your fund and you will find have well under 10% in domestic stocks (my own Aviva pension fund has 6.2% in the UK and 62% in international equities). Why would they find unlisted UK companies so much more attractive? British tax breaks used to boost other countries? Hunt may envision financing professors in small labs in the Midlands who will change our world. His plan instead may end up financing the consolidation of the plumbing sector in Atlanta instead. This makes no sense – at all.
If we really want to be more like Australia, there is perhaps a better, if less glamorous place to start. Australia’s big funds have 22.3% in Australia-listed companies. Perhaps if Hunt had wanted to demand a display of confidence in the UK he could have pressed for a voluntary compact to invest in (currently very, very cheap) listed UK equities instead. It’s hard to make the argument that in return for UK tax benefits, pension managers should be forced to invest in global private equity. It’s easier to make one that they should be forced to invest in listed UK assets. That might even have helped with one of Hunt’s other mildly conflicting priorities – to persuade companies not to stay private but to list in the UK and to make our capital markets deeper and more liquid. Instead, it seems likely that if pension funds have to bump up unlisted exposure they will cut listed exposure. Lose-lose.
But this isn’t the main issue here. The thing to focus on is that we have crossed a line that we never should have.
The state has entered the defined-contribution pension market and is now directly influencing your asset allocation. Sure, they have stepped back from actually forcing funds into their compact. But the tactic of suggesting one thing (we will force you!) and settling on a slightly lesser version (we won’t force you if you do it before we have to force you!) is pretty standard in modern government. Expect more of your money to go the same way. This makes sense for them – what short-of-cash government with both a borrowing problem and a growth problem could possibly let a £2.5 trillion honeypot alone? And it suggests the world’s big PE companies are getting value from the vast sums they spend on lobbying governments. It might make financial sense for us too. Let’s give the private equity industry the benefit of some doubt – perhaps they do just manage companies better than anyone else can; perhaps the outperformance can continue regardless of the price of debt; and perhaps rates are soon to turn anyway – making this an excellent entry point. But it’s also risky: It isn’t remotely voluntary for us (we can’t easily move out of those default funds), and it smacks of being very much more about politics than the performance of your portfolio.
Pension fund trustees should have one aim only: to deliver the best possible financial returns at the lowest possible cost for those who have entrusted them with their cash. Pacts with governments, however “voluntary,” to fund government priorities should have absolutely no part in that.
More From Bloomberg Opinion:
• Making Britain Great Again Risks a Pension Disaster: Stuart Trow
• Cathie Wood and the Sound of a Changing Market: Marc Rubinstein
• UK Market Reform Safeguards Blanket Gilt Buying: Chris Hughes
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Merryn Somerset Webb is a senior columnist for Bloomberg Opinion, covering personal finance and investment, and host of the Merryn Talks Money podcast. Previously, she was editor in chief of MoneyWeek and a contributing editor at the Financial Times. She is also a non-executive director of two investment funds, Murray Income Trust Plc and Blackrock Throgmorton Trust Plc.
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