How to separate the UK’s long-term financial health from political short-termism.
“When is a Sovereign Wealth Fund not a Sovereign Wealth Fund?”
“When it’s called a Pension Protection Fund.”
OK, it’s not likely to get Michael Macintyre calling. But it is amusing how people who unquestioningly buy-in to the need for pension funds to be under-written by what is, effectively, an insurance policy, can also feel so fundamentally opposed to a similar concept being used elsewhere.
The Pension Protection Fund, the Universities Superannuation Scheme, and the Local Government Pension Scheme are, to all intents and purposes, Sovereign Wealth Funds. Which means they are managed specifically to deal with long-term liabilities.
And yet, the moment I mention Sovereign Wealth Funds being used more widely in the UK, I can predict a whole series of objections that will follow:
“We’ve missed the boat on that one. The North Sea oil money has all gone.”
“Sovereign Wealth Funds only work if you have a short-term abundance of natural resources.”
“It would cost a fortune in management fees.”
“We don’t have the time or patience. It would take years to become fully invested to the point where assets broadly match liabilities.”
I will return to those, but it’s important to create some context here. Because we, as a nation, are faced with a series of worrying long-term financial planning issues.
We have an ageing population at the same time that migration into the UK is falling. This combination creates a demographic imbalance. Unless we all work longer and harder (with the retirement age rising well into the seventies), we simply won’t be able to afford our cumulative pension, healthcare and long-term care costs.
Although the deficit has fallen, the national debt has never been higher. And that’s not going to change. In 2010, Liam Byrne, the Labour Treasury Minister, famously left a note on his successor’s desk reading: “There’s no money”. And that hasn’t changed significantly. The only way we have currently to pay for hospitals, schools, police and other public services, is to borrow more. And borrowing more means we are effectively deferring pain by asking our children and grandchildren to pick up our tab.
It’s a long-term problem which creates its own challenge because we expect our politicians to solve it. Politicians who are never more than five years from the next election, in which their chances of success are unlikely to be improved by explaining that they have made some great improvements to the prospects of people retiring in 2069!
It’s over a decade since the government handed responsibility for monetary policy and interest rates to the Bank of England. That took a major economic responsibility out of the political domain. And I strongly believe that this government should follow that example by honouring its 2017 General Election manifesto pledge and start planning for the establishment of a sovereign wealth fund which could be:
- Used to invest for the long-term.
- Made available to fund core infrastructure projects inside and outside the UK.
- Earmarked for specific causes or liabilities (from the NHS to flood defences).
- Ring-fenced by an independent board reporting to the Governor of the Bank of England giving it true independence.
And I know it’s possible, because funded occupational pension funds are already established in this way.
As for the cost arguments, well this will need to be funded. But not simultaneously. I don’t know many people who refuse to insure their house because they could avoid the premiums by throwing caution to the wind. And the management fees would never be an issue as a fund of this size would be managed internally.
It works in the pensions industry in the UK. And it works in many other countries, like Norway, where every Norwegian owns a portfolio of investments, from property to equities, in a fund that is planning for the country’s future.
Which leaves us with a final riddle:
“When, in the UK, is sensible, independent, long-term planning deemed not to be sensible, independent, long-term planning?”
“When it’s called a Sovereign Wealth Fund.”
It’s time we put a few myths to bed and start to think much more urgently about this route to solving some of the most pressing long-term issues our country faces.