Pension fund investment

 This blog post is a rare departure for me. I am going to support, in principle at least, a UK Government initiative! Even if it was overhyped and delivered somewhat less than promised. Yes, of course, there is a but.

In his Mansion House speech last month, the Chancellor presented a series of new reforms to the financial services sector. The aim is to unlock capital for industry and increase returns for savers. The idea is to increase funding liquidity for high-growth companies through reforms to the UK’s pension market and strengthening the UK’s position as a stock market listing destination. The government is also reforming and simplifying the financial services rulebook to ensure growth-friendly regulation of any financial services centre without compromising stability. This is part of a broader process known as the Edinburgh Reforms.

A key element of this reform is the consolidation of pension funds to enable them to raise their returns by making more investments considered higher risk – especially in small firms developing new technologies. According to government calculations, this could create an extra £50 billion of investment into innovative firms by 2030, giving a 12% (£1,000 a year) boost to the pension of an 18-year-old who enrols in one today.

The largest pension scheme in the UK is the Local Government Pension Scheme (LGPS). There has already been a pooling of assets, and the latest consultation envisages further consolidation. Notably, this process is being led by the Treasury, which sees this as part of the UK pension investment reform. LGPS consolidation in Scotland is devolved, so outwith Treasury control. Here consolidation is moving more slowly, supported by trade unions but resisted by employers.

UK pension funds have assets of over £2.5 trillion, the largest in Europe and second only to the US worldwide. However, UK funds have cut their allocation to British-based companies, bringing down the valuations of many UK businesses. UK funds have also been slow to invest in infrastructure, unlike many global funds, who even own critical elements of UK infrastructure. As Colin Maclean put it in The Herald recently, “The process certainly accelerated with Brexit and UK political turmoil, but more recently it has seemed to be driven by financial regulation and some debatable guidance on risk and returns from pension fund advisers. Much of the UK problem seems self-inflicted.”

It's not as if UK funds have an excellent record of success. The investment return on the average UK pension fund over the last 10 years has lagged behind Australia, Canada and the Netherlands. This significantly reduces retirement pensions for those in DC schemes and undermines the viability of better DB schemes. The investment industry is always wary of greater regulation, and the lack of transparency means most pension contributors need more understanding of these issues. This limits the voluntary buy-in by pension funds, and the current initiative is tame.

Another reason for investment reform is the need for pension funds to green their investment strategies and portfolio assets to help the world transition to a net-zero economy. Expertise is needed to achieve this;; small funds rarely operate at the necessary scale. A new report from the University of Exeter funded by the Department for Energy Security and Net Zero highlights the role of pension schemes and other asset owners in the net-zero transition. It warned that it was too late to tackle climate change incrementally, and a dramatic acceleration of progress across society and the global economy was now required. However, the current tools available to pension trustees to evaluate their strategies are limited, and they typically delegate their investment decisions to ESG indices. As a pension trustee, I am only too aware of their limitations.

Pension fund consolidation makes a lot of sense, as does investment in a broader range of asset classes. However, support for the financial deregulation that comes with the broader reforms may be dampened by memories of how previous “light touch” regulation led to the crisis conditions in 2008 – and the main cause of poor investment performance ever since. Also, further movement away from the EU's rules, as the Chancellor envisages, would make it harder to secure the prize of an equivalence agreement with the UK and other jurisdictions.

Defence Strategy Refresh

All governments have a defence strategy, which typically outlines the threats and how the government proposes to respond to those threats. The current UK strategy claims to be an integrated review of defence, development and foreign policy. However, it actually has a proliferation of strategies, which as a RUSI paper puts it, ‘the Review depends on too many other ‘strategies’ that have not had the same guiding mind, fall short of the lofty ambition in the capping document and do not connect the Integrated Review’s ends with the requisite ways and means. The suite of strategies is weakened as a result.’

I was recently asked to write a briefing note on the UK defence strategy as part of a Europe-wide analysis of how Western European nations are responding to the Ukraine War. I had looked at some of this in a paper I wrote for Prospect on defence procurement earlier this year. I enjoy working with European colleagues as it gives you a different perspective on domestic policy.

Ben Wallace, the Secretary of State for Defence, has had to publish a revised strategy today. In fairness, defence reviews can often rapidly become outdated. While the Integrated Review recognised the threat of Russia, it probably couldn’t have anticipated the invasion of Ukraine. This means the downgrading of conventional forces (reducing the Army to 72,500 soldiers) and the emphasis on an ill-defined ‘Global Britain’ looked short-sighted when large-scale fighting occurred in European cities. For political reasons, the review also played down the importance of EU cooperation at a time when the EU is strengthening its security and defence policy. 

We now need a more realistic strategy, returning to the continental strategy the UK had for much of the last century. Military mass is still required on land, sea and air, with digital augmenting the strategy, not replacing it. Even the Royal Navy, which arguably did better than the Army in the last review, is stretched painfully thin with new deployments worldwide. The Ukraine War has demonstrated the continued importance of artillery, and while armoured vehicles will evolve, they are not obsolete. Technology matters, but mass still counts on the battlefield.

The Johnson/Truss era included some fanciful commitments to increase defence spending to 3% of GDP. RUSI estimates that 3% would cost an extra £157bn by 2030, the equivalent of raising income tax by 5p. That isn't going to happen, whoever wins the next General Election. There is a welcome commitment to increase spending to 2.5% of GDP. This has cross-party support, although the Shadow Defence Secretary, John Healy, has rightly argued that too much of that extra money is needed to plug a £17 billion black hole in the MoD's budget.

Ben Wallace will be leaving the Cabinet at the next reshuffle, which is a pity as he is one of the more respected ministers in a struggling government. He wanted to be the next NATO Secretary-General, but Britain’s reducing post-Brexit influence was unlikely to deliver that. He has said he will speak out if the 2.5% pledge is not delivered. Meanwhile, he is left to unveil an updated defence strategy with no new money. It was evident from the European workshop I attended that other European countries are increasing their spending. While they may have started from behind the UK, they don't have our fanciful global pretensions. 

So, Wallace is left with robbing Peter to pay Paul, and the much-criticised army cuts will go ahead to ensure there is sufficient cash to replenish stocks depleted by supplies to Ukraine. However, the update does at least appear to recognise that the European stage has changed, and lessons need to be learned from Ukraine—the 'battle-lab' as Wallace puts it. 

The three-front war scenario (Russia, Far East and Africa) comes in for some scathing commentary from Simon Jenkins in today’s Guardian. He argues that none of these scenarios is a plausible threat to national security, ‘They emerge from some vague notion about “Britain’s role in the world”, echoed by Boris Johnson down the mustier corridors of Whitehall.’ He won’t be reassured by today’s paper which says, ‘We need to be able to compete, challenge and contest threats globally.’ 

We should also remember that Defence spending remains a crucial part of the Scottish economy. The latest data shows jobs have increased by one-third to 33,500 - contributing £3.2bn to the Scottish economy. The space sector is a big part of that growth. Much-needed meaningful reform of defence procurement still seems a long way off. Today’s paper feels like a rehash of old rhetoric.

The armed forces play a vital role in protecting and safeguarding the UK. At a time when full-scale war has returned to Europe, and external threats are continually changing, that role has never been more critical. It remains to be seen if today’s refresh provides the means to respond to an uncertain world.

Hope and Despair

 'Hope and Despair' is the appropriate title of Neil Findlay's new book covering the last few years of his time as an MSP. It was politically tumultuous from the aftermath of Brexit and Theresa May in 2017 to Boris Johnson in 2021. As a Scottish Labour MSP, the period began with socialist leaders in Scotland and the UK, fatally undermined internally and externally. But, of course, none of this avoids Neil's trenchant commentary! 

The book takes the form of a diary, which describes and comments on the events of the period he was involved in. I was closely involved with many of the same events, and the book contains incidents I had forgotten about or often wished I had! 

It starts with the successful campaign to get Richard Leonard elected. The book is full of where Neil feels Richard got it wrong and when he got it right. However, in the main, it details the appalling behaviour of some MSPs in this period, ‘the more private a meeting or report, the quicker it is leaked.’ So bad that many MSPs did all they could to avoid Parliamentary Group meetings. As Neil puts it, 'dominated by the most negative people you will ever come across.' Neil also wasn't a big fan of his local council leadership, like so many, dominated by council officers rather than taking political control of issues. Neil was often described as 'Jeremy Corbyn's man in Scotland'. He certainly did admire the Labour Leader but wasn't slow to tell him when he got it wrong. He also covers the many efforts from the Labour right wing to undermine him.

He covers many of the debates in the Scottish Parliament during this period, focusing on the causes he was most associated with. I say debates because Neil was among the few MSPs who could debate. I recall taking a group of UNISON Stewards to Parliament one day. They all commented that most MSPs just read out prepared speeches, and only Neil and Murdo Fraser actually debated. There is little I admire about Westminster, but I agree with Neil that the committee system and some backbenchers demonstrate a degree of independent thought that you rarely see at Holyrood.

Neil was clearly happiest as a backbencher championing the causes he pursued with a tenacity rarely seen in Parliament. The transvaginal mesh scandal, miners' justice, social care, and drug policy come up time and time again. Even though he was a list MSP, local concerns around jobs and services pour out of every page. This was a tough period for his family as well, not least his wife Fiona's health and his mother in a care home during the pandemic. Neil was understandably critical about the way older people were treated throughout COVID.

Neil Findlay is one of those rare elected politicians. He is a working-class guy from a community devasted by deindustrialisation who never planned to be a politician. That sense of community comes through every page of this book, as do his socialist principles. As he puts it, 'It is about what you feel, your outlook on life, your sense of community and the culture you are immersed in.' We could do with more Neil Findlays in Parliament. Sadly, we are likely to see less in the current political culture.

This isn’t a cheery book as the title suggests, although it has a certain black humour in places. However, it was time well spent reading. He ends, as all socialists should, with optimism, ‘live in hope and have a belief that tomorrow will always be better than today.’ 

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.

Post-pandemic social care - Hopes and Disappointments

 I was speaking at the launch of the report 'Post-pandemic Hopes and Disappointments', which looks at post-pandemic social care across Europe. Written by the brilliant Lisa Pelling from the progressive Swedish think tank Arena Idé. This is a follow-up to an earlier report on social care, to which I contributed a chapter on Scotland. 

This new report argues that it is now high time to evaluate what reforms have been undertaken in the different countries following the pandemic. Unlike Scotland and the UK, Sweden's pandemic inquiry has already reported. It asks what change have trade unions and their members been able to make? What strategies were successful, and what battles have not yet been won? What are the current priorities of trade unions in the care sector?

The report examines seven countries, including Scotland, focusing on these questions. You can watch my summary of the lessons learned and the future challenges for Scotland here (22 minutes in). https://www.facebook.com/Arenaide/videos/191738276912822

In short, these are immediate actions on funding and Fair Work for those who work in social care. We also need to rethink the proposed National Care Service, moving away from centralisation and privatisation towards a national framework with local delivery and accountability. The Scottish Government's pause is welcome, but this mustn't be an excuse to kick social care into the long grass as they did in England with the Dilnot report. This is an issue the Jimmy Reid Foundation will discuss at its STUC Congress fringe meeting in Dundee next month.

The report concludes that funding elderly care with private insurance is not a solution either. It is unlikely to bring more resources into the sector. Rather, only a redistributive tax system is likely to provide enough funding for care needs. And the question would still be: where will workers come from? Improvement in pay and conditions is pivotal as well. 

Another important conclusion is that we have enough evidence: it’s time to move on to implementation and reforms. There are too many glossy documents, too many commissions, and too little action. Very true in Scotland as elsewhere!

Freedom of Information and democracy

I was speaking at an event hosted by the Jimmy Reid Foundation on the reform of Freedom of Information (FoI) in Scotland last night. Topically in the news this week with The Herald publishing a secret register of Scottish Ministers' declaration of interests. Yes, a secret declaration which tells you all you need to know about the culture of FoI in Scotland. And, of course, the publication of Matt Hancock’s Whats App messages, which illustrates why FoI has to evolve with new methods of communication.

Katy Clark, MSP was talking about her proposal for a bill to reform Freedom of Information legislation in Scotland, including to:

·      extend coverage to all bodies delivering public services, services of a public nature and publicly funded services

·      create a role of Freedom of Information officer

·      increase the proactive publication of information

·      improve enforcement where necessary

·      and improve compliance with human rights law.

 

Carole Ewart, Director of the Campaign for Freedom of Information in Scotland, gave us an overview of the development of FoI in Scotland. She also highlighted the latest in a long line of Scottish Government consultations on reform, none of which have made the step changes we need. She pointed to a succession of research, reports, campaigns and a Parliamentary inquiry report of May 2020, which concluded, “There is a broad consensus that FOISA has brought significant benefits …. However, witnesses have identified a number of areas for improvement, both in terms of the legislation itself and in its implementation.”

 

The key point in my contribution was that public access to information is not simply a legal duty – it is a fundamental part of our democracy. I particularly welcome the proposal in Katy’s bill to extend the scope to all bodies delivering public services. This is a long-standing UNISON and trade union ask supported by public opinion. Successive Scottish Information Commissioners have said that Section 5 powers to designate additional bodies have been “woefully underused” and called for immediate steps to protect FOI rights from the damage caused by the outsourcing of important public services.

 

Legislative change is vital, but we also need to make a culture shift away from regarding FoI as a matter of legal compliance to understanding it also as a vehicle for community empowerment and development. This means properly resourcing the Commissioner’s office to deal with appeals and promote best practice. That is also true for FoI staff in public bodies, particularly in local government subject to disproportionate funding cuts. I did a survey of FoI staff for UNISON a few years back, which highlighted:

·      Rising request levels and fewer staff.

·      Poor awareness in the organisation of FoI duties.

·      Resistance from some managers.

·      Limited capacity of colleagues to respond.

·      Poor structure of requests.

 

This is reflected in my experience as a user of the system. In the past year, I have done several large-scale FoI requests across most of the public sector. Some public bodies did not respond on time – or at all. Others used delaying tactics, seeking clarifications or redacting in an overly legalistic way. In fairness, several went further than the legislation in answering questions that were strictly outside the legislation. When I was preparing for one major survey, I was surprised at how difficult it was to find the FoI officer on websites. It was rarely on the home page, and searches flagged up lots of detail but not the all-important FoI page with the publication scheme.

In summary, I welcome Katy Clark’s proposed Bill. Legislation is an important driver of change in itself, but also because it can encourage culture change. There needs to be greater recognition of FoI as a public duty, building organisational capacity, transparency and stronger publication schemes. If you care about transparency and our democracy, please respond to Katy Clark’s consultation.