Chancellor Rachel Reeves has been reportedly scrutinising UK pensions funds for some months now. This has now culminated in the pension schemes bill. The main change seems to be consolidating some of the small funds into a few larger funds. The rationale for a shake-up of pension funds is that compared with other countries of comparable economic size, British investors, including pension funds, mostly choose to invest in overseas enterprise rather than in their own country.
The government has now persuaded 17 of the largest pension funds, representing some 90% of UK earners enrolled in defined contribution schemes, to voluntarily agree to put more of their money into boosting the British economy.
“The Bill is a game changer, delivering bigger pension pots for savers and driving £50 billion of investment directly into the UK economy – putting more money into people’s pockets through the Plan for Change.”
Investment in the UK economy
If the Mansion House Accord is successful, at least 10% of eligible assets would be invested in private markets. This would result in £74bn of the £735 bn in total assets being allocated to private markets – £48bn more than in the baseline scenario.
Additionally, 5% of assets would be directed to UK-based private market investments, leading to £37bn invested in the UK (£26bn above the baseline scenario).
Although the scale of the Mansion House Agreement is impressive, the cautious Treasury has still ensured that there are special reserve powers in the pension schemes bill so that if the schemes have not voluntarily complied by 2030, the government can enforce this asset allocation. Data collection on the assets that are already invested in by the pension funds will begin in 2026.
Bearing in mind that the total UK government spend is estimated at £1,335bn, and some 5% of this is currently spent on public investment (=£66.7bn), the special measures in the recent bill are giving the chancellor a lot more money to redirect into British investments, although it is assumed that the pension companies will make their own choices on which enterprises to invest in rather than be forced into specific investments by the Treasury.
ISAs: a brief summary
I suggest there are good arguments for going further than this by imposing a similar measure on ISAs too. ISAs were introduced by Gordon Brown some two decades ago as a means of getting more people to save. They allow any British taxpayer to invest up to £20,000 each year tax-free. The most recent report on them reveals that about 40% of the population saves in them, and that in the last year counted, this amounted in total to £72bn.
There are three types of savings that attract this tax-free status: the ISA (which can be cash savings or put into various pooled ISAs managed by finance companies), the LISA (which is savings for the purpose of buying a home or withdrawing a lump sum on retirement) and the Child Trust ISA for children. In a LISA, or lifetime ISA, individuals can save up to £4,000 per year, and the government will add £1,000 to this each year provided it is withdrawn only for the purpose of buying a home or for retirement. After retirement age, LISA money can be withdrawn tax-free, whereas money withdrawn from a pension pot is taxed as income after the first 25% taken each year.
Best use of our hard-earned savings
Some readers will be horrified at the thought of the government ‘grabbing’ their hard-earned savings. But this would be to sensationalise the matter. A counter-argument is that the tax-free benefits of ISAs are considerable, so the government should be allowed to steer where this money is invested. The saver would not lose the whole savings pot but only be directed to put some of it, say 10%, into much-needed British infrastructure and enterprise. The 10% amount invested would be guaranteed by the government for eventual pay-out.
Patriots should applaud such a move. But sadly, the mainstream media nowadays usually prefer stories that focus on individual rights (my money is my own to spend as I wish) rather than what will benefit society. There are plenty of pages and websites offering investment advice on how to maximise your money, usually by casino-type betting on which overseas enterprises will bring large returns within the next five years, or worse, cryptocurrency.
Thames Water’s current plight
A prime example of an enterprise desperately needing British pension money is Thames Water. My previous article about its current plight revealed that it is desperately seeking a new investor to cover its £16bn debts. The one company interested, KKR, has now just withdrawn, which is a good thing, as it was likely that its way of operating would just repeat the old financial engineering that ultimately increases leverage (debt). The article suggested that the report from the Cunliffe Commission might arrive too late to save the situation. In fact, Cunliffe has now issued an interim report, and the pages on water company ownership and investment (pp. 77–90) are worth summarising.
Change in investor profile
First, it is noted that investors in water companies since privatisation in 1989 have changed from publicly listed companies to private, mostly overseas, funds. It used to be assumed that water companies should be low-risk–low-return investments attracting the patient capital from pension companies. To some extent, that is true (see list of Thames Water investors in the previous article). But a table in the report shows that water company returns to shareholders have greatly diminished in recent years. Indeed, Southern Water claims to have paid no dividends recently. So, investor appetite for water companies is reduced:
“The Commission has consistently heard that given the scale of the return at risk and the nature of the risks, investors no longer perceive investment in the water sector as either a ‘fair bet’ or as ‘low risk-low return’. Such investors have been clear they would be willing to accept lower upside returns in exchange for greater stability over downside risks.”
Sewage stories scare off investors
Recent media stories of sewage flow into rivers with fines and threats to CEOs have spooked investors:
“An important factor bearing down on investor sentiment appears to be the lack of a clear long-term strategy and guidance on trade-offs (for example, between environmental objectives and water bills) from government on the sector. The Commission has heard that this has damaged certainty over future returns. This, it is argued, is reinforced by an unbalanced government and media narrative on the sector, which has highlighted failures without acknowledging success or challenges. Half of the respondents to the Call for Evidence commented on the negative effect on investment of the political and media portrayal of the water industry.”
Solutions to the sewage problem
I have been a consistent opponent of the way sewage is sensationalised by political parties and in the media. I tried to get the LibDems to modify their conference motion about fining the CEOs. I did not approve of their making sewage the pictorial centrepiece of their recent election manifesto. I do not approve of the Labour Party (Steve Reed, secretary of state for the environment) announcing recently the same populist solutions to the sewage problem, removing CEO bonuses and threatening them with prison, while also announcing glibly that the Labour government is investing some £17bn more in water companies, when this is in fact not new money coming from the Government fiscus but the money that Ofwat is allowing the companies to receive from its customer bills in the next five years. Nor do I support the panacea solution from the left wing – just nationalise the water companies – which this Labour government has had the sense to firmly reject (as it would cost too much).
I heartily approve of the way Cunliffe is steering the arguments and, I hope, public attention away from the blame game and towards ways of reforming regulation and co-operation between the different agencies that have an impact on what water companies do.
Consumer involvement with water companies
But back to the problem of water companies needing more patient investors. My suggestion is that this can come either from the new 10% requirement on pension funds or from ISAs. I prefer that it comes from ISAs or LISAs, as this can introduce more individual choice and involvement. Of course, there are lots of people who are too busy with work and family to pay close attention to their investments, so they just let the pension funds, or some well-recommended finance company, manage their investments for them. But others, especially those near retirement or retired, like to follow their money more closely, and they like to choose their ISA.
If investment in your local water company was one of the options for 10% of your ISA, this would stir up more attention to what the company is doing. You would be looking at this not just from an outraged consumer’s or wild water bather’s point of view but also from an investor’s point of view. Cunliffe does actually propose more consumer input to water company boards.
Pride in your investment
I suggest that ISA investors would still be given choice regarding what public investment to put their money in each year. This would create some market competition on the offerings to induce investment. For example, water companies could reduce bills for their investors or even waive them entirely if the investment reached a certain level. This would be a big saving for those who are paying such bills from taxed income now. They could also give them some nice nibbles and eats if they attend the AGM, as it would be good to have more investor/consumers looking critically at the local water company achievements, problems, choices and plans.
It should be a matter of pride to invest in improving your local water company. Water provision, sewage works, nature-based drainage of rainwater, clean rivers, all these matter for the generations who will live in your location in decades to come.
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