The cost to the Treasury of the generous tax relief afforded our pensions is about £50 billion a year.
Should pensions get that tax break from the UK government if the funds won’t even invest in the UK?
The question arises following a recent move by Scottish Widows, a giant fund group that manages assets of £225 billion and is part of Lloyds Bank, which was bailed out by the government to the tune of £20 billion during the 2008 financial crash.
We got most of that bail out back, eventually, but still, it owes us. Morally and actually.
And the government is desperate for pension funds to put more money into UK equities, to support growth, the economy and as a show of faith.
Instead, Scottish Widows plans to cut the exposure to UK equities in at least some funds from 12% to 3%, the Financial Times reports.
Scottish Widows says this is part of a “more globally diversified approach”. It isn’t alone in this move, in fact it is possibly behind the curve.
Big funds have been moving money out of the UK to get a piece of the racier US markets for some time.
It is tempting to think that Scottish Widows, around since 1815, following suit is a sure sign that the market is about to turn.
That aside, this is a blow to chancellor Rachel Reeves, who is also desperately seeking sources of tax income.
Since the amount pension funds invested in the UK has fallen from 50% of assets in 2000 to just 4% now, she might think the funds are asking for trouble.
SCM Direct, the online wealth management firm, wrote to Reeves a year ago suggesting that she:
“Introduce a requirement for pension funds to maintain at least 20% of their equity exposure in UK listed equities to retain their tax-advantaged status. This would simply return pension funds to their UK equity allocation as recently as 2017.”
Reeves didn’t reply – too busy tweaking her CV perhaps – but maybe it is time for her to have another look at this notion.
Alan Miller at SCM asks whether the move by Lloyds is “a prime example of rear-view mirror investing or given their new bias to anything US maybe a name change to US Widows is appropriate? Why should UK pension funds keep their UK tax status when they can’t be bothered to invest more than a few beans in the UK?”
Nicholas Hyett, Investment Manager at Wealth Club, says:
“As things stand, pension managers’ primary duty is to achieve the highest possible return for their investors for a given level of risk. Any manager who unilaterally lets other priorities get in the way of that wouldn’t be doing their job properly, whether those other priorities are supporting the UK stock market or cutting carbon emissions.
“However, it’s up to government to set the terms on which pensions reliefs are available. Pensions are by far the largest pool of private capital in the UK – and it’s not unreasonable that the government wants to tap that to support UK plc.
“That may not be in the best interest of pensioners, but then lots of pension policy isn’t – annual allowances, limits on tax free lump sum withdrawals and tax on pension withdrawals are all bad news for pension savers but benefit the taxman and therefore society more widely.”
Total UK pension assets are about £3.2 trillion.
The 4% of that in UK equities is £128 billion. If all funds followed the Scottish Widows approach, that would see about £96 billion desert the UK stock market.
That’s a serious amount of money, enough even to trigger a crisis.
Miller says: “For context, UK pension funds have already withdrawn £400 billion+ from UK equities since 2000, and another £96 billion would accelerate this trend catastrophically.”
The UK already has the lowest domestic equity allocation among major economies (4% vs. Australia’s 37.7%) -- further cuts would deepen this disparity.
I think Scottish Widows is pushing its luck. The Chancellor should have a word.
