HAMISH MCRAE: Time to repair Gordon Brown’s pension errors

Everyone desires extra progress, or no less than the three important events all profess to need it. They additionally need pension funds to take a position extra in UK enterprise.

Jeremy Hunt introduced reforms in his Mansion House speech in November, and is predicted to do extra in subsequent month’s Budget. Rachel Reeves, his shadow, has simply launched Labour’s plan for monetary companies, known as Financing Growth. It is actually a reduction to have politicians that do not wish to clobber the City. But the Conservative provide is pernickety.

The Chancellor’s initiatives have been issues like a brand new progress fund within the British Business Bank, a enterprise capital fellowship scheme to ‘help the subsequent technology of world-leading buyers in our VC funds’, ‘£20 million to foster extra spin-out firms, companies created utilizing analysis performed in universities’, and so forth.

For the Opposition, it is the identical kind of stuff, although with effective statements relatively than any element. So it is ‘Labour will work with native authorities pension schemes to set out greatest follow for adopting related, cost-effective in-house fund administration capabilities’ and ‘growing variety in monetary companies broadens and deepens the expertise pool, and delivers higher outcomes for companies’.

There’s nothing unsuitable with this, however the issue is that neither the tweaks of Hunt nor the grand statements of Reeves sort out the massive query: why do UK pension funds not spend money on UK equities?

On the quiet: Gordon Brown slipped the tax raid via in his first Budget with out a lot trouble

Back in 1997 they and different UK institutional buyers owned almost half of all UK-quoted shares. Now it’s 4 per cent. And the reply? It was Government coverage that pushed them to take action.

The coverage got here in two halves: tax and regulation. The tax was Gordon Brown’s raid on dividends paid to pension funds. Until 1997 pension funds bought a tax credit score. So in the event that they have been paid £80 in dividends, they bought again £20 as a credit score. The rationale was that the corporate had already paid company tax and for pensioners no less than there needs to be some kind of rebate.

The numbers didn’t look large. It raised £5 billion a yr and, since pensioners didn’t realise what was taking place, Brown slipped it via in his first Budget that summer season with out a lot trouble.

Cumulatively, although, the impression was large. Not solely did pensioners lose the revenue, they misplaced the expansion in funds that may have accrued from reinvested dividends. The complete loss has been put at £250 billion over the following 20 years. And after all now it raises no cash as a result of pension funds maintain hardly any British shares.

I rank that tax raid as one of many three most severely idiotic selections by Chancellors I can recall – the opposite two being John Major placing the pound into the European Exchange Rate Mechanism in 1990 and, going again even additional, James Callaghan introducing the Selective Employment Tax in 1966. But we have been kicked out of the ERM after two years, so the injury was restricted. And the SET, which put an additional tax on service-sector employees, ended when VAT was introduced in seven years later. By distinction, the dividend tax raid has lived on till now.

The different factor that killed fairness funding by pension funds was regulation. It is advanced, however the modifications in prudential regulation have been meant to push the funds into supposedly protected gilts and different fixed-interest holdings, relatively than supposedly dangerous equities.

You can see the argument. If somebody goes to retire in say 15 years, put their financial savings into Government bonds that mature then. Better to have a mediocre however assured return than the likelihood (however not certainty) of a significantly better one.

As it occurred, from the Nineties to 2020, fastened curiosity investments didn’t do too badly. But that got here dreadfully unstuck with the surge in bond yields (and corresponding collapse in costs) from 2021 on.

In any occasion, now most pensions are outlined contribution, the place savers bear the chance, the case for security over efficiency is way weaker. Long time period, equities provide a greater return than gilts. Rationally they have to be the appropriate alternative.

Governments will not be good at sticking to the Hippocratic Oath in its brief type: ‘First, do no hurt.’ But this is an opportunity to appropriate a hurt of the previous. Reverse Brown’s tax raid. It would price hardly something. Hunt might do it subsequent month, and Reeves might present a Labour authorities could be on the aspect of pensioners by supporting it.

And each events might decide to reforming regulation so savers get balanced portfolios, relatively than be herded into bonds giving zero safety towards inflation.