Effective defence procurement

I was in Westminster this week at the launch of a paper on defence procurement I wrote for the Prospect trade union. 

The launch included interesting contributions from the Shadow Minster for Defence Procurement, Chris Evans MP, Andrew Kinniburgh (Made in UK) and Prospect’s Bob King. Chris welcomed the report and stressed the importance of a new approach to procurement based on the mutual respect of all the procurement parties. He pledged that a future Labour Government would prioritise sovereign capacity in defence procurement, recognising the sector's importance to local communities. Andrew focused on the role of SMEs in moving away from the increasing reliance on defence imports. Finally, Bob King emphasised the role of Prospect members in delivering for UK defence.

My report starts by looking at the UK defence strategy, or more accurately; it's far too many strategies. The UK Government has published and recently refreshed an Integrated Review, but in my experience, many strategies can lead to confusion. Particularly when they cover more than one department. In fairness, defence strategies often date quickly, and the war in Ukraine has turned much of the 'Global Britain' rhetoric on its head. We are back to war in Europe with tanks, infantry and artillery.

The chatter about a 3% of GDP defence budget has quickly dissolved thanks to Truss economics. 2.5% is now a target ‘when conditions allow', which is unlikely anytime soon. However, as a new analysis shows, Britain still has the biggest defence budget in Europe at a time when just about everyone outside Africa is spending at Cold War levels. 

The UK defence industry supports around 260,000 mostly quality jobs and is a big exporter. These jobs are spread across the regions and nations of the UK, including Scotland. This has a vital economic spin-off, what the Dunne Report called a 'Prosperity premium'. However, there are challenges, with skill shortages and a shortfall in research and development. A staggering fact is that Amazon spends more on R&D than the worldwide defence industry.

Defence procurement, not just in the UK, needs a better record of delivering outcomes. The recent Public Accounts Committee report is brutal. 13 formal reviews in 35 years tell their own story. But, in fairness, purchasing defence equipment is unlike buying cornflakes and paper clips. Military equipment is developed over a long timescale, during which ministers and even governments come and go, domestic priorities change, and external threat assessments are varied. Larger projects often require international collaboration, which brings additional challenges. The MoD also needs help recruiting and retaining staff with the requisite skills to manage often overcomplicated processes.

I also looked at international procurement practices. There has been a noticeable worldwide shift to local production or offset arrangements. The UK has the most open market, while the EU, NATO and countries like Türkiye and India have explicit strategies to support their defence industries. I explain why they do this and why the UK should follow suit.

The report's core describes the current defence procurement regulations and my recommendations for a new approach. This is an explicit UK by default strategy linked to an industrial strategy, with workforce planning and social value at its core. Social Value measures the direct, indirect and induced impact of procurement. Around one-third of defence spending returns to the Treasury, so it makes no sense to recognise this in bid evaluation. This comes through various taxes and public and private sector pay. Procurement should also support public policy considerations, including the real living wage, employment standards, and ending tax dodging. I propose a mix of regulation and guidance to achieve this. Guidance is more flexible but doesn't necessarily deliver the necessary cultural change.

My report concludes:

“Without a thriving defence industry, the UK puts at risk its freedom to act in defence of the country’s interests at home and abroad. And the armed forces risk losing their technological advantage over actual and potential enemies. Achieving these aims requires a commitment to sustain and strengthen national defence design, manufacturing and support capabilities in a partnership between the MoD and industry. The UK by default.”

Pensions update

 I was doing a general update on pensions last week for a gathering of pension trustees. I have long been interested in pensions, even before becoming a pensioner! I was the joint secretary of the biggest pension scheme in Scotland, and I am currently a director of a pension fund and have helped others with ESG issues. I am writing this from the STUC in Dundee, which surprisingly has no pension motions on the agenda.

A lot is going on in pensions that workers ought to be concerned about.

The fallout from the Truss economic crash is still felt across the sector. Pension funds have used LDI (Liability-Driven Investment) strategies for around 20 years to protect themselves from adverse movements in interest rates and inflation and reduce the impact on their funding levels when interest rates fall, rather than just the scheme's assets. All was well and good until Truss came along, resulting in many pension schemes struggling to find the required cash in such a short timescale. This also meant that many had to sell gilts, further reducing their value. We now have several reviews of LDI, and some funds are looking at the options for seeking redress for losses. 

The cost of living crisis will impact members' ability to contribute to pension schemes. We should watch the number of opt-outs, as inflation remains stubbornly high. The IFS has suggested that public sector pension schemes should reduce pension contributions as a substitute for inflation-linked pay increases. This strikes me as a short-sighted policy as it would come with reduced benefits and greater pensioner poverty in the long term.

While the Chancellor has been making noises about long-term pension reform, current reforms are going slowly. The much-vaunted pensions dashboard has been delayed again. Even more worrying is that commercial companies can establish their own dashboards. The scope for pension scams is enormous, and pension trustees must communicate effectively. The Statement of Strategy is a technical reform, but we are still awaiting details on the format.

I was at a pensions conference listening to Stephen Timms MP, the very able Chair of the Work and Pensions Select Committee. He highlighted the need for a political consensus around higher pension contributions and reducing the age for auto-enrolment from 21 to 18. He welcomed the Royal Mail collective DC scheme but argued that DC schemes generally needed to offer better value for money.

Regarding my interest in ESG investment, climate change is still going in the wrong direction. Pension funds need to focus on the genuine risks to their investments and not be fooled by the level of greenwashing being sold. We still have poor data, different regulations and general inertia in assessing corporate action. Pooled funds are a particular challenge. While we should focus on the downside of climate change, we should also focus on the upside of investment opportunities.

There has been a welcome focus recently on the pension gender gap. There is a 40% difference in retirement outcomes caused by unequal pay, career breaks, and greater part-time work. For example, a two-year break can result in an 11% reduction in pension for a worker on £30,000. Pension funds can help by looking closely at the structure of their scheme. The deficient level of state pension provision in the UK means that those with little or no private pension wealth are at a severe disadvantage in retirement. The IFS has published some ideas on the taxation of pensions, and the UK Government have given a giant handout to the wealthiest pensioners in the Budget. Not quite the tax reforms we require.

The State Pension Age has also been in the news, with the UK Government deferring decisions until after the elections. Older people vote! Changes have significant financial implications. According to the IFS, a one-year increase in the state pension age in the late 2030s would likely save around £8-9 billion a year in today’s terms, and delaying the planned rise in the state pension age to 68 by seven years would cost at least £50 billion. In France, huge numbers are hitting the streets over a change in the pension age to 64. While we quietly allow this debate to pass us by when life expectancy is falling.

If there is one message from all this – we all need to pay more attention to pensions.