Most strikingly, in an interview with the Financial Times on Monday, the chief executive of Lloyds Banking Group described these plans as a “form of capital controls” and compared them to the heavy-handed state interventions which are more common in economies like China. He definitely has a point.
The UK has lagged behind here. Analysis by the Pensions Policy Institute (PPI) suggests that UK pension funds on average only hold 6 per cent of their portfolios in private assets, well below the 20 to 30 per cent in world leaders such as Canada and Australia.
However, the Labour Government has taken this idea much further. Under the new “Mansion House Accord”, confirmed in May, 17 managers including Aegon and Legal & General pledged to invest 10 per cent of their workplace portfolios in a wider range of private assets, including infrastructure and property funds. That additional investment could be worth around £50bn by 2030.
Moreover, while the Mansion House Accord is still notionally a voluntary agreement, the Government will now have a “reserve power” which would allow it to set specific targets for schemes to invest in private assets, including in the UK.
A mandatory 5 per cent minimum allocation to UK private assets would indeed smack of “capital controls”.
The first is that many funds are already increasing their allocations to private assets and that these can provide superior returns to savers. Indeed, some funds have already committed to allocate more than the 5 per cent and 10 per cent targets. Ministers have therefore insisted that they do not expect to have to use their new powers.
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The second argument is some sort of appeal to the “greater good”. There may well be clear benefits for the UK economy in increasing the amount of private capital available to fund infrastructure projects, housebuilding, or start-up companies. But it would be far better to focus on creating the conditions under which these projects and companies can attract more capital on their own merits, rather than to force private pension funds to invest in them.
The Government’s third argument, though more implied than explicit, is that the pension fund industry benefits from a large amount of public subsidy, including tax relief on pension contributions. This might justify the Government having some more say in where the money is invested.
Julian Jessop (@julianhjessop) is an independent economist and fellow at the Institute of Economic Affairs
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