Investing in the Future: Boosting Savings and Prosperity for the UK
In this article, Martin Wolf discusses the failures of the UK pension system, which has left the country unable to generate the long-term risk capital necessary for development and provide adequate pensions to its population. The focus on making pension promises absolutely safe has made them unsustainable, resulting in a moribund stock market, underinvested companies, undue dependence on foreign capital, and a stagnant economy. However, the solution lies in the middle ground: defined collective contribution schemes, which promise pensions based on actual long-term returns, sharing risks across individuals and generations and taking advantage of the economies of scale available to large long-term investors.
Transforming the Pension Protection Fund (PPF) into a series of UK pension superfunds could be the first step towards this vision. This would involve allowing for the voluntary transfer of creditworthy funds into the PPF, with the required payment of a capital buffer for the continuity of benefits, replacing the sponsor’s previously open-ended obligation. The assets would be actively managed instead of ending up in the hands of insurance companies. The National Employment Savings Trust could also be incorporated into the new superfund, to be called GB Savings. The ultimate goal should be to consolidate other defined benefit pension funds and give those who invest in defined-contribution schemes the opportunity to switch to the new collective superfunds.
However, there is a big question of to what extent new superfunds should be encouraged or forced to invest in UK assets. While some of these requirements might make sense, it would be dangerous for the government to force funds to invest in specific assets or specific asset classes beyond that national mandate.
In conclusion, the failures of the UK pension system have led to a dead-end retirement. It is time to think big and act boldly by embracing defined collective contribution schemes and transforming the PPF into a series of UK pension superfunds.
Why More and More Companies are Adopting the Four-Day Workweek
The standard five-day workweek has been the norm for decades, but more and more companies are starting to adopt a four-day workweek. This shift has been driven by several factors, including increased employee productivity, reduced overhead costs, and a better work-life balance for employees.
One company that has successfully adopted a four-day workweek is Perpetual Guardian, a New Zealand-based financial services firm. After conducting a trial of the four-day workweek, the company found that employees were 20% more productive, happier, and more engaged in their work. In fact, the trial was so successful that the company decided to make the change permanent.
Other companies that have adopted a four-day workweek include software company Basecamp, marketing agency Reusser Design, and creative agency The Good Alliance. These companies have reported similar benefits, including increased productivity, reduced overhead costs, and happier employees.
However, it is important to note that a four-day workweek is not suitable for all types of jobs or industries. Some jobs require employees to be available for longer hours, and some industries require employees to work in shifts. Additionally, not all employees may be able to work a four-day workweek due to existing commitments or personal circumstances.
In conclusion, the adoption of a four-day workweek is a growing trend among companies, driven by the benefits of increased employee productivity, reduced overhead costs, and a better work-life balance for employees. While not suitable for all types of jobs or industries, the four-day workweek represents a shift towards more flexible and employee-centric work arrangements.
Summary
The UK pension system has failed to generate the supply of long-term risk capital and provide the population with adequate and safe pensions. The solution lies in defined collective contribution schemes, which promise pensions based on actual long-term returns and take advantage of the economies of scale available to large long-term investors. Transforming the Pension Protection Fund (PPF) into a series of UK pension superfunds could be the first step towards this vision. Companies are increasingly adopting a four-day workweek, citing benefits such as increased employee productivity, reduced overhead costs, and a better work-life balance for employees. However, a four-day workweek is not suitable for all types of jobs or industries.
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Following a series of narrow-minded, short-sighted and overly theoretical decisions, the UK was left with a pension system unable to generate the supply of long-term risk capital on which development depends or to provide the population with a whole ( not just a few privileged groups) with adequate and safe pensions. Symptoms of this disaster include a moribund stock market, underinvested companies, undue dependence on foreign capital, and even a stagnant economy.
The origins and consequences of this policy failure are documented in Investing in the future: boosting savings and prosperity for the UK, from the Tony Blair Institute for Global Change. I have discussed aspects of it in a number of columns, most recently at the end of March. In particular, the narrow focus on making pension promises absolutely safe has made them unsustainable. This has crippled the companies responsible for these exorbitant promises. It also deprived new businesses of much-needed venture capital. Finally, when defined benefit plans collapsed, the public was pushed towards defined contribution plans that impose too much risk for individuals to easily manage.
None of this matters in the fictional financial economy, where borders are unimportant, national investment is independent of national savings, corporations have frictionless access to liquid financial markets, and markets are rational and forward-looking. But these are fairy tales, not a reflection of reality.
Between 2001 and 2022, the paper notes, “UK private sector pension fund holdings in UK equities fell from an average of 50% of the portfolio to just 4% today. Over the same period, their holdings of fixed income securities (primarily gilts and corporate bonds) have increased from 15% of total assets to around 60%. Unsurprisingly, with companies forced to use their cash flows to fill the nearly bottomless pit of pension fund deficits, rather than to invest, businesses have become less and less dynamic. The performance of the UK stock market was surprisingly negative compared to other countries. But the market is moribund because the corporate sector has become a zombie.
Who benefited? The answer is pension advisors, insurance companies (who profitably pick up the pieces), and the government, which enjoys a captive source of ultra-cheap funding. Meanwhile, returns from such defensively managed pension funds have been far lower than would otherwise be possible.
Meanwhile, the country has moved from an angular solution, where all the risk fell on the sponsors of the system, to one where it falls on individual contributors. The sensible alternative, however, lies somewhere in between: defined collective contribution schemes: eternal funds that promise pensions based on actual long-term returns. This arrangement would share risks across individuals and generations and take advantage of the economies of scale available to large long-term investors who can bear risks that others cannot.
All of this is explained in detail in this important report. The question is how to move on to something better. Here the authors have a clever idea. They note that the Pension Protection Fund (PPF) now invests £40bn and has enjoyed an impressive performance since its inception in 2004. It generated a surplus of assets over estimated liabilities of £12bn. At present, however, the PPF fund only takes over when the corporate sponsor goes bankrupt. Instead, the authors suggest, the PPF could be transformed into the first of a series of UK pension ‘superfunds’. This would be done by allowing for the voluntary transfer of creditworthy funds into the PPF with the required payment of a capital buffer for the continuity of benefits. This commitment would replace the sponsor’s previously open-ended obligation.
Instead of ending up in the hands of insurance companies, the assets would be actively managed. Furthermore, they argue, the National Employment Savings Trust could also be incorporated into the new superfund, to be called GB Savings. The ultimate goal should be to consolidate other defined benefit pension funds. It would make sense to give those who now invest in defined-contribution schemes the opportunity to switch to the new collective superfunds.
A big question is to what extent new superfunds should be encouraged or forced to invest in UK assets. Some of these requirements might make sense. But it would be dangerous for the government to force funds to invest in specific assets or specific asset classes beyond that national mandate.
Short-sighted decision-making has driven the UK into a dead-end retirement. It’s time to step out and therefore to think big and act boldly.
https://www.ft.com/content/84a1b1d1-3ebe-4693-a051-69c432720dff
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