Welcome to my Blog

It mostly covers my work as UNISON Scotland's Head of Policy and Public Affairs although views are my own. For full coverage of UNISON Scotland's policy and campaigns please visit our web site. You can also follow me on Twitter. I hope you find this blog interesting and I would welcome your comments.

Thursday, 1 December 2016

Time for action on investment management

If you read anything about pensions this year, you should include the recently published Financial Conduct Authority (FCA) interim report on the asset management market. It may not be the easiest read, but it shines a light on why we get such poor value for money from our pensions in the UK.

OK, I don’t expect you to read all 206 pages! There is an executive summary. It should certainly be required reading for pension trustees and in the SLGPS, pension board and committee members. It confirms what UNISON has been shouting about for some time – we need much greater transparency over the real cost of using investment managers.

The UK’s asset management industry is massive. It manages £6.9 trillion of assets. Over £1 trillion for individual investors in the UK and £3 trillion on behalf of UK pension funds and other institutional investors. The service offered to investors comprises a search for return, risk management and administration – although it is the investor that bears virtually all the risk.

Over three quarters of UK households with occupational or personal pensions use these services, including over 10.2 million saving for their retirement through pension schemes. There are also around 11 million savers with investment products such as stocks and shares ISAs.

There will be very few UNISON members who are not touched by this industry, although most will probably have never heard of it. More importantly, they will have little idea how much of their hard earned cash goes to the industry. The report states that asset management firms have consistently earned substantial profits with an average profit margin of 36%! These margins are even higher if the profit sharing element of staff remuneration is included. The saying ‘we are in the wrong job’ has a whole new meaning!

On transparency of costs the report states that investors are not given information on transaction costs in advance. These costs can be high and add around 50 basis points on average to the cost of active management for equity investments. The report says:
“In addition, we have concerns about how asset managers communicate their objectives and outcomes to investors. Investors may continue to invest in expensive actively managed funds which mirror the performance of the market because fund managers do not adequately explain the fund’s investment strategy and charges.”

This is something the LGPS has been addressing through its transparency code and the Scottish LGPS has issued guidance to funds in Scotland to adopt the code. However, its still only voluntary at present and measurable outcomes are some way ahead. The drive for transparency is not as present on the retail side with only half of investors even aware if they are paying charges.

One of my colleagues likes to illustrate this issue using a fridge analogy. If you buy a fridge you can compare the marked price. But the real comparison should include, energy use, delivery charges, warranties and much more. Very few of these charges are transparent when it comes to asset management.

More of us will be familiar with the investment disclaimer, "past performance is no guarantee of future returns". The FCA report highlights the reasons for this. Funds measure performance over different time periods and there is a practice of merging poorly performing funds, “giving investors the false impression that there are few poorly performing funds on the market”. Even those who do outperform don’t continue to outperform the relevant market index or peer group for more than a few years.

Pension trustees are often sold active investment strategies on the grounds that they deliver higher returns than passive funds that track an index. In the UK the split is around 20% passive to 80% active, whereas in the USA the split is closer to 50:50. However, the evidence in the FCA report suggests that actively managed investments do not outperform their benchmark after costs. And the costs of active investments are significantly higher than passive investments as this chart from the report shows.



Charges have also have remained stable, unlike charges for passive investments, which have been falling. The FCA suggests that this reflects competitive pressures and unwillingness in the active fund market to undercut each other. Weak pressure on prices can lead to weak cost control.

The FCA report is particularly scathing about the role of investment consultants, with 60% of the market controlled by three firms. For example, they found that investment consultants accept hospitality from asset managers, suggesting a further conflict of interest and could result in poor outcomes for end investors. They are considering a market investigation reference to the Competition and Markets Authority (CMA).


The report concludes with a number of very welcome interim proposals on remedies – not least on transparency and all-in fees. However, this is a hugely powerful and profitable industry and they will be lobbying hard to water down any action. It’s up to us to reclaim our pension funds for the workers who rely on them.

Thursday, 24 November 2016

The case against Trident replacement


The replacement of the Trident missile system cannot be justified on moral, economic or defence grounds. That's the conclusion of a new report launched in the Scottish Parliament today by the Jimmy Reid Foundation.

The moral and philosophical case against renewal is well understood, even by those who support Trident replacement. Inherently indiscriminate nuclear weapons can never satisfy the just war principles of discrimination and proportionality. 

There is also a defence case against renewal; one increasing supported by former defence chiefs and others who recognise that the massive expenditure on Trident is at the expense of conventional defence. Equipment and resources that are needed to address real threats to our security, rather than a vanity project maintained largely to maintain a seat at the UN Security Council.

Important those these arguments are, the strength of today's report is in making the economic case against Trident renewal. The often vastly inflated claims of job losses are carefully debunked and the report calculates that some 600 civilian jobs are dependent on the existing Trident system at Faslane and Coulport.  The replacement of Trident will cost at least £205bn - a figure that is likely to go up with the weaker pound (as much of the spending goes to foreign companies) and the normal cost drift of defence programmes. That means every Trident job costs £18m.

We also need to recognise the opportunity cost of spending £205bn on other public services. With more than 30,000 devolved public sector jobs lost in Scotland since the crash, these resources would provide many more jobs and services that people really need. It could also boost real manufacturing jobs in the UK, rather than transfers to banks and foreign multinationals.

As trade unions we cannot argue the indefensible, simply because it has job implications. What we have to do is to minimise the impact and negotiate a just transition to other work. It might be argued that this is easy for a union with no members linked to Trident replacement to make. However, there are other policy areas where we have taken just such an approach. For example, we are in favour of public ownership of the gas and electricity sectors, a policy that would result in the loss of sales jobs in the industry done by UNISON members. Our approach is not to defend the obvious waste in the current system, but rather to make the case to transition our members into more useful and more satisfying work.

In this context, the report calls on the Scottish Government to establish a Scottish Defence Diversification Agency, whose main focus would be the planning and resourcing of jobs away from Trident. The report outlines how this could be done and points to case studies from other parts of the world.

Spending staggering sums of public money on a useless weapons system cannot be justified at any time. However, given the current state of the public finances it is beyond indefensible. The strength of this report is that it focuses on the economic case against Trident replacement and offers a just transition for those who may be impacted by non-renewal. Their skills are much needed elsewhere.



The report will be available on the Reid Foundation website
http://reidfoundation.org

Wednesday, 23 November 2016

Autumn Statement - little Scottish cheer

Today’s Autumn Statement failed to live up to the rhetoric. There was little for those who have suffered the most from austerity and nothing for our beleaguered public services.

The main significance of the Autumn Statement for Scotland is the impact on public spending. Under the new devolved powers the Scottish Budget is made up of the Barnett formula, less the Block Grant Adjustment, plus devolved tax changes agreed by the Scottish Government.  This means the Barnett formula remains an important component of the Scottish budget and is based on a proportion of English spending on devolved services, like health and local government.

The Barnett consequentials of today's Autumn Statement are an additional £800m for Scotland. Sadly, this is less attractive than it sounds because it refers to capital spending. While capital spending is welcome, including the City Deals, we have to recognise the significant leakages it has from the Scottish economy. In contrast, revenue spending is much more likely to be spent on the high street.

The departmental revenue spending plans remain the same, which means we are still facing substantial cuts to services over the next three years - up to £1.5bn, most of which the Scottish Government is likely to pass on to local government. There was no hoped for increase in English NHS or social care spending, which would have had positive Barnett consequentials.

This all means a tricky Scottish budget for Derek Mackay MSP when he sets out the Scottish Government's spending plans on 15 December.

Other announcements today that impact on Scotland include an increase in the so called National 'Living Wage' from £7.20 an hour to £7.50 from April next year. This only applies to those over 25 years of age and is not to be confused with the real Scottish Living Wage, calculated based on what people need to live, which has recently been increased to £8.45.

There is an increase in the lower income tax threshold to £11,500 that benefits higher income taxpayers as much as the low paid. The same applies to the higher rate tax thresholds and the previously announced cut in Corporation Tax. As IPPR argues, this tax cut for the top is the wrong priority.



There is also some modest relief for low paid members who will transfer to the new Universal Credit benefit, because the taper rate is to be cut from 65% to 63% from April next year.

The economic forecasts in the statement are generally gloomy. Growth forecasts are down, debt and borrowing will rise, in a large part due to Brexit. There has been a relaxation from Osborne's unachievable targets, but as the OBR says, it isn't going to be easy to balance the books in the next parliament either. Ageing along could add 0.8% of GDP by 2025/6. All of this shows that austerity has failed dismally, yet the UK government ploughs on regardless.


The OBR has identified delayed investment since Brexit along with inflation as the big driver of lower growth, only partly offset by export opportunities from the lower pound. In a separate announcement today, the ONS released their post-Brexit population forecasts for Scotland. This chart shows how population growth will be much slower in Scotland and that has economic consequences as well.




The more informative OBR forecasts offer little cheer. Wages will be £1000 lower in 2020 than the government predicted in April.



Overall, as Jeremy Corbyn puts it, "This is what happens when government and the economic model it's relied on for a generation fails to deliver".



Friday, 18 November 2016

Inequality: moving from analysis to action

The causes of poverty and inequality are well understood, we now need to have the difficult conversations about taking action.


All this week, BBC Scotland have been running a series of features under the heading Unequal Scotland. They have looked at education, health, life expectancy and income. This fairly describes inequality and the impact it has, not just on those most impacted, but also the economy and everyone in Scotland.


As Douglas Fraser explains, this issue is being given a lot of attention by those in power, including heads of government, central bankers, the International Monetary Fund, even the Davos gathering of the economic elite. Nicola Sturgeon has put the tackling of inequality alongside economic growth as her twin priorities. Even a Tory Prime Minister has targeted her political message at those "struggling to get by".


Describing inequality is something we are very good at doing. Taking real action is more tricky, primarily because it involves some difficult conversations with those of us who are not in poverty.


A good example of this is highlighted by Gideon Calder from Swansea University. His research asks, is it okay for parents to pass wealth down to their children? So the kids gain a house when mum dies, for example. And before that, get everyday benefits just because their parents are relatively well-off? He concludes that we are not willing to have this conversation because the 'family' is sacrosanct.


The First Minister's poverty tsar touched on a similar point with her call for increased taxes, not least by addressing inheritance tax. She also picked on tax increases for the richest and the need for a progressive council tax - something the Scottish Government has ducked yet again. She said: "When people say they want a really wonderful NHS they don't say I want to pay more taxes for it. Well, I'm afraid you cannot have a really wonderful NHS unless you are willing to pay more taxes for it."


However, her most telling comment was that she was not convinced governments would raise taxes to the levels needed. She said: "You [governments] can always go further but you'll always have your eye on the next election and what people can expect". This goes to what I call Scandamerica, the idea that we can have Nordic levels of public services without most of us, not just the very rich, having to pay more taxes. Remembering that we now have the powers to address this in Scotland.


The Scottish Government is currently consulting over what a Scottish social security system should look like. This is important because some 37% of benefits will be devolved to Scotland, when you exclude pensions. However, as Govan Law Centre and others have highlighted, the consultation is almost entirely about process, not about adequacy of benefits, a crucial element of any strategy for tackling income inequality.


This theme is also covered by the tax lawyer Jolyon Maugham QC who points out that this year we’ll collect around £170bn of income tax, but forego through reliefs about £30bn of income tax - almost £500 a year for every man, woman and child in the UK. He says these reliefs go  overwhelmingly to those who need it least, the inevitable consequence of two deliberate policy choices: to distribute that £30bn through the tax system and to fail to monitor what good it does.


Tackling these reliefs would include some difficult conversations on issues like ISA's and tax relief on pension contributions, which are valued by middle income groups. Perhaps his most striking statistic is that the highest earning 15,000 taxpayers, almost 0.05% of all taxpayers, netted 5.5% of total deductions and reliefs. Most will have seen six figure reductions to their income tax bills.


This isn't just a parochial issue for us in Scotland and the U.K. As Thomas Piketty argues in the Guardian this week, Trump’s victory is primarily due to the explosion in economic and geographic inequality in the United States over several decades and the inability of successive governments to deal with this. Fiona Buchanan from Christian Aid makes a similar point in relation to the developing world, also highlighting the issue of gender justice.


There are some serious attempts at developing a consensus around some solutions. The IPPR's Economic Justice Commission is one such initiative. Their background paper makes the point that for all the rhetoric about a strong economy, it isn't an economy that works for all. Half of all UK households have seen no meaningful improvement in their incomes for more than a decade. The JRF's 'Talking about Poverty' project also points the way to a better understanding of the solutions.


So, hats off to the BBC for doing what a good public service broadcaster should do - educating us on probably the most important issue of our time. However, we need to move on to some, often uncomfortable solutions. Tackling inequality is in all our interests, because more equal societies do better on every count. This means we all have to contribute to the solutions, and yes, it will cost us.

Thursday, 17 November 2016

A practical approach to reducing council debt

Council borrowing has come under scrutiny with a call from the Scottish Greens urging the UK government to write off what they describe as "unethical" loans made to councils in Scotland. This is similar to Unite the Union's, 'Scrap the Debt' campaign.

The response from the UK Treasury was a predictable - no chance. That doesn't mean the campaign call isn't justified. After all there is precedent with housing stock transfer, albeit that was to achieve a specific, if flawed, policy objective. It is also important to understand that councils have been borrowing from the Public Works Loans Board at rates well above the cost to the Treasury. In effect this has been a nice little earner for the Treasury.

I understand the campaign reason for the analysis by the Scottish Greens that councils are typically spending about 42% of the money raised by the council tax locally on servicing debts. However, this is misleading as only 15% of council revenues now come from the council tax, largely as a consequence of the regressive council tax freeze.

Commentators often erroneously explain council borrowing by making comparisons with personal finance. It has to be understood that councils are under a legal obligation to produce a balanced budget. They do not borrow money simply to pay for the running costs, this is for capital spending on schools and other services. The exception is PPP schemes, which are funded from revenue, at exorbitant cost.

As the Treasury is going to ignore this call for debt cancellation, we need to look at what else councils and the Scottish Government can do to reduce the debt burden.

Following a call by UNISON Scotland, the Scottish Government has relaxed the rules governing loans funds, giving councils greater flexibility. This could save councils in Scotland as much as £50m.

Councils should also be looking at their borrowing books and refinancing the older debt, in a similar way individuals shop around with their mortgages  The interest rates on some of this debt is way above current rates. The primary constraint is that some councils unwisely signed up for punitive repayment penalties. The worst, but not the only, example of high exit fees is the Lender Option Borrower Option (LOBO). As ex Barclays Capital employee Rob Carver put it: “You just need a Bermudan swaption pricer to know the relevant volatility surface, some kind of interest rate model calibrated to the appropriate processes and the full forward and spot curve". Understandably, not skills present in most council finance departments!

The other option for replacement and future loans is using bonds. Something that used to be commonplace, but has gone out of fashion. Around 60 local authorities in England and Wales have joined together in the Municipal Bonds Agency, which has the express aim of reducing council’s capital costs by arranging loans at cheaper rates than the PWLB. The English Local Government Association, which worked to set up the agency, estimates council savings on  financing costs over 30 years could be as high as £1.45 billion. They have already forced the Treasury to cut PWLB rates. Scottish councils have sadly been very slow to consider this option, the recent exception being Aberdeen City Council. In our 'Combating Austerity' report we calculated that councils in Scotland could have saved between £270m and £337.5m over 30 years by issuing their own bonds.

Councils and health boards should also be robustly monitoring and restructuring/refinancing their PPP schemes. Refinancing usually requires the approval of the Scottish Government, who have been slow to do this, although the SFT are looking at a few schemes. I suspect part of government's reluctance is that a major use of refinancing requires the cooperation of councils using their prudential borrowing powers. Better progress is being made with monitoring contract performance.

Calls for debt cancellation are justified and would be a much needed boost to council finances slashed by Tory austerity and more than passed on by the Scottish government. However, the Treasury is unlikely to change its mind and therefore we should be actively pursuing practical alternatives to the more expensive borrowing provisions commonly used by councils

Tuesday, 8 November 2016

We need a clean energy future - not fracking

A busy week for the fracking debate in Scotland, but a decision still looks some way off.

There was some speculation ahead of today's publication of the research sponsored by the Scottish Government that the minister would announce a bill on fracking. Instead he announced a public consultation will be launched in January, before any decision is made on whether to allow fracking. At the same time, the government will publish its climate change plan and a full strategic environmental assessment. In the meantime the moratorium remains in place.

The independent research published today covers the following issues in relation to UOG:

Public health impacts
Economic impacts
Climate change impacts
Understanding and monitoring induced seismic activity
Understanding and mitigating community level impacts from transportation
Decommissioning, site restoration and aftercare.

The Minister for Business, Innovation and Energy Paul Wheelhouse said: “The extensive package of research published today will ensure the public has access to a comprehensive evidence base on the potential health, economic and environment impacts of UOG."

FoE head of campaigns Mary Church said: "The economic case for pursuing an unconventional gas industry in Scotland simply doesn't stand up, while the risks of doing so could be utterly devastating for communities and the environment. No state has had a moratorium on fracking, looked at the evidence and decided it's a good idea."

These are initial reactions and it will take all the interested parties some time to digest this research. Meanwhile, other studies will add to concerns over fracking. In particular, a report in TheFerret highlights a new study by scientists at Yale University that indicates chemical contamination from the fracking industry could increase the risk of childhood leukaemia.

Scottish Labour is keeping up the pressure on the Scottish Government by lodging a Holyrood member's bill aiming to "change the law to ban fracking in Scotland". Labour MSP Claudia Beamish has launched a public consultation as part of her bid to have fracking banned in Scotland. This follows a vote in the Scottish Parliament last June, in favour of an outright ban.

Her Bill has a focus on the climate change implications of fracking. She said: "Scotland relying on fracking for our energy needs will lock us into an energy infrastructure based on fossil fuels long after our country needs to have moved to clean energy. SNP ministers now face an urgent choice - they can work with Labour to ban fracking, or they can work with the Tories to allow drilling under family homes in parts of central Scotland."

Climate change is certainly the right focus for a fracking ban. For me there are three key arguments against lifting the moratorium.

Firstly, we rightly follow the precautionary principle in terms of safety. Something our industrial heritage has taught us - just ask anyone suffering from asbestosis or other industrial diseases. Fracking in the wide open spaces of the USA has highlighted significant safety concerns. In Scotland fracking will take place under people's homes in a densely populated area.

Secondly, there is considerable doubt that gas from fracking is even economically viable. Many experts doubted the financial case, even before the falling price of gas. As for jobs, well, we have seen fanciful claims for other energy sources and few have delivered what was promised.

Thirdly, we don't need it. We should not compromise Scotland's climate change targets, or the UK's broader commitment to limiting global climate change to two degrees. Scotland should be leading the world in moving to clean renewable power, not aiming to extract ever more inaccessible fossil fuels. The risk is that shale gas doesn't just replace imported gas - it replaces renewables.


The third reason alone is reason enough to ban fracking in Scotland. Launching a consultation alongside the climate action plan is therefore a helpful juxtaposition. At the very least the Scottish Government's position is significantly less gung-ho than the UK government. However, an outright ban is now the way ahead, so we can concentrate on a clean energy future.