According to Rachel Reeves, having bigger pension funds will unlock more investment. This is one of those ideas which is … odd. But it’s one, however odd, which seems to be driving current policy.

Local government and other state pensions are something of a mess. There are, by one count, 86 different funds. Oddly, for government pensions, they’re also fully funded — real, actual, money has been put aside and invested to pay those future pensions. Clearly it’s possible that if there are fewer than 86 funds, with fewer than 86 sets of managers and paying in and paying out bods and all that malarkey then less might be spent on administering, running, those 86 funds. No one doubts that greater efficiency is possible. 

It’s the other half of the justifications that worries me: “Merging local government pension schemes has the potential to release £200 billion to fortify the UK economy, “ Erm, why? The total amount in said funds is near £400 billion. Those funds are currently invested. So, merging fund management structures doesn’t change the amount saved to be invested. How will this unleash more to invest, then? How will we get 100 per cent more to invest out of just changing management? 

Further: “This would be good for the economy, good for taxpayers and good for communities.“ All of that could be true but that’s not who pension funds are supposed to be good for. Pensions funds are for pensioners and if something’s not good for pensioners then a pension fund shouldn’t do it. That they are not even touting this as being good for pensioners means it quite probably isn’t.

But beyond such quibbles, there’s a much larger and more basic problem. The underlying claim is that larger pension funds will be able to make larger investments. Take the risk on buying larger chunks, or the same pro rata chunks of larger projects. This way we find the capital to finance big, hefty, projects like, umm — HS2 perhaps? Which brings up one possible objection to the idea. 

But more basically, yes, we’ve all got a problem with the financing of large and very large projects. We might require the mobilisation of billions, tens of billions, of capital — whether equity or debt — to get the one thing done. No one person — well, okay, aside from Elon — has that kind of money. It’s necessary to aggregate savings and capital from many people to do that thing. So far so obvious. 

There are two ways to do that too. One is to build up vast funds, with many people paying into such funds, which then invest in these big things. That’s the claim here about local authority pension funds. Aggregate not just the savings of London penpushers but of all penpushers and so be able to take larger chunks of larger projects. Well, okay.

But this is a problem we’ve already solved. The Anglo Saxon style of financial markets has already solved this problem, by having markets in finance. If I — just as an example — wanted to buy into some series of vast oil projects, I could, at the twiddle of a couple of buttons, buy one three billionths or so of exactly that for about £25. It’s called “a share in Shell”. If I wanted two three billionths I could buy two shares for £50. If I prefer a slightly different bundle then Exxon, Chevron, BP and others all offer me much the same opportunity. The same is true if I prefer bonds. 

The very fact that we have public markets in shares and bonds means that we don’t, in fact, need powerhouse investment funds. Because we’ve solved that same problem another way. We disperse financial risk on large projects by allowing millions of people to buy into them in tiny slices. That is, we don’t have to aggregate the funds themselves so they can take risk, we’ve solved that same problem from the other direction.    

We already achieve diversification and thus moderation of risk through that use of public investment markets

Thus, the argument that we require larger pensions funds in order to allow investment fails, simply because this is a known problem and one that we solved a couple of centuries ago. We already achieve diversification and thus moderation of risk through that use of public investment markets. We don’t need investment funds to be behemoths at all for precisely that reason. 

Now, it is true that such public markets don’t invest very much in the sorts of things that politicians would like them to invest in. One possible response to that is Oh Dear, What A Shame. However obvious and pleasing that response is, it’s also not quite the right one. For if these public markets won’t fund the dreams of politicians then that means the aggregate view of all those investing is that the dreams of politicians are not worth investing in.

Or, if we moderate that a bit, that the dreams are incorrectly structured. There’s not enough of the revenue opportunity being captured by the capitalists — and pension funds are capitalists — to tempt them to invest. The answer is to structure the opportunity so that more of the benefit can be captured. Change the taxation of profits — inside the corporation, or on investors in it — perhaps. Or possibly the construction of some new form of contract will be necessary. Or, obviously, if this isn’t possible then it’s not a good investment which capitalists shouldn’t invest in. Whether large pension fund or small or even the individual investor which that market system allows. 

That is, changing the structure of the pension funds does not do what is claimed. It does make it easier for politicians to browbeat said funds into investments the politicians would like to see funded but that’s a different issue and quite possibly closer to the actual motivation here. 

Shame on me for even thinking such a thought.