Ross Clark Ross Clark

Is Jeremy Hunt following in Gordon Brown’s footsteps?

Credit: Getty Images

Anyone fancy having a flutter with 5 per cent of their pension fund on unlisted start-ups? It is not necessarily a bad idea – it is only 5 per cent, after all. As part of a portfolio which is balanced by more bread and butter investments it need not be reckless. At best, you might just pick a future Microsoft or Google – and at worst, well, the other 95 per cent of your investments could smother your losses.

But it seems that we are not really going to have the choice – at least not those of us who have defined contribution pension funds. The Chancellor, Jeremy Hunt, used his Mansion House speech on Monday evening to announce what he calls the Mansion House Compact – an agreement between him and the operators of large pension funds to allocate more of their capital to unlisted companies. By 2030, he says, they have agreed to invest 5 per cent of their funds in this way. At present, less than 1 per cent is invested in unlisted companies. In order to spread the risk, there will be a consolidation of pension funds. As for defined benefit schemes, the Chancellor announce separate proposals: local government pension schemes will have their arms twisted to allocate 10 per cent of their funds to unlisted companies. Needless to say, in their case the good old taxpayer will be waiting in the wings should the strategy go wrong.

It is true that many UK pension funds seem to have developed a strange aversion to UK shares, smaller ones especially. Three decades ago, a third of UK shares were held by UK pension funds; now it is less than 3 per cent. The lack of interest from pension funds has added to the deep malaise in smaller UK shares over the past couple of years – and that is the safer, listed ones. Like so many other investors, UK pension funds have gone chasing returns in US technology stocks, as well as beefing up on government bonds with miniscule returns.

What Hunt announced at the Mansion House is the mirror image of what Brown did a quarter of a century ago

Yet it is hard to see that Hunt is really coming to this from the point of view of the investor. Hunt asserted in his speech that more unlisted investments could mean a 12 per cent boost to pension funds, meaning that someone starting out in their career now could end up retiring on an extra £1000 a year in retirement. Yet at no point did he even mention the word ‘risk’. Hunt kept describing unlisted companies as ‘high growth’ – without once admitting that they don’t all succeed in growing; on the contrary, start-ups have a notorious habit of imploding. The conceit that a 5 per cent allocation will magically result in an extra £1,000 for pensioners in half a century’s time is ludicrous.

Hunt has really come to this subject from the opposite angle. He wants to find ways of boosting the UK economy by increasing the availability of capital to small and start-up companies – and has hit upon pension funds as a potential source of that capital. ‘We want to be the world’s next Silicon Valley’, he began, before going on to explain his Mansion House Compact. That tells you all you need to know: the interests of pensioners come second.   

Mind you, that is how it was with Gordon Brown’s pension reforms, too. What Hunt announced at the Mansion House is the mirror image of what Brown did a quarter of a century ago, when he obliged pension funds to allocate more capital to fixed interest investments. That wasn’t really about the interests of pensioners, either – rather he wanted someone to soak up the government bonds he needed to issue to finance his expansion of the public sector. Then, as now, pension fund holders were corralled for ulterior political motives. There is an alternative: simply to let the pension fund industry itself decide how to invest its members’ funds – and let its performance speak for itself.  

Comments