Is The FTSE Cheap For A Reason? Wealth Week Episode 25
Sometimes, the unexpected consequences of political meddling can take decades to become visible. There’s no escaping the fact that the UK stock market is in decline, but those who want to blame it on the default scapegoat of Brexit are badly mistaken. Like so many of the issues facing the country today, it’s origins can be traced back to the disastrous premiership of Tony Blair and his dark, brooding Chancellor Gordon Brown.
When they came to power in 1997 the UK represented 10% of the world’s stock market indices. A significant contributor to the size of the market was the involvement of the big pension funds and insurance companies who allocated around 50% of their equity funds to UK stocks. I well recall how Britain played a leading role in the expansion of the telecoms industry, my own firm building the first software platform to handle billing between competing carriers then licensing it to companies from Kingston to Kuala Lumpur.
Maggie Thatcher’s privatization of lumbering state-owned utility companies combined with the launch of Personal Equity Plans made share ownership possible for ordinary folk, not just the big institutions. Obviously, no self-respecting Labour government could allow this unbridled capitalism to continue improving people’s living standards. They had to find a source of funds for their redistributive agenda so the youthful Tony asked his Chancellor, the King of Stealth, to hatch a plan. Gordon Brown abolished the tax credit on dividends. Most people had no idea what that was, but figures from the laughably named Office for Budget Responsibility suggest that the cost to pension funds of that one measure has been £230 billion. The impact of this accelerated the move from defined benefit to defined contribution pensions, putting most of us at the mercy of stock market performance to determine whether our retirement will be spent in comfort or penury.
For the pension funds themselves, governments and regulators have long encouraged them to move away from ‘risky’ equities into ‘safe’ government bonds to meet their obligations to scheme members. This has had two big impacts. A massive reduction in stock market investment and a scarily high exposure to bond yields and prices. As the Bank of England keeps raising interest rates to fight the inflation of its own making, so the yield offered on new government bonds must rise. What happens to the billions of pounds of existing bonds owned by the pension funds and insurance companies? They fall in price so that their value reflects the lower yields they offer. This is what killed Silicon Valley Bank, but so far there’s been complete radio silence on the pending disaster in pensions and insurance companies. That’s because you and I can’t empty our pension in the same way we can withdraw our bank deposits. There won’t be a high profile ‘Pension Run’ to rival the recent bank runs. But the losses are real and will impact the pensions of hundreds of thousands of us in the decades to come.
Now, parties on both sides of the political divide, that is to say the left and the extreme left, have once again set their sights on the reserves in pensions and insurance companies. Having slaughtered them with the fall in bond prices, they now want them to start making major allocations to equities again. But, as we recall Ronald Reagan’s famous warning ‘I’m from the government and I’m here to help’, I do not expect this to be the starting gun for a major revival in the FTSE stock market. The government is already drowning in debt and is looking for ways to fund pet projects such as the suicidal focus on Net Zero. The chances are that, like government bonds, these projects will offer nothing but return-free risk. Pay close attention to your own pension fund and make sure you are in control of the asset allocation decisions.
New Labour also introduced a tax on privatised companies that would force many of them into the hands of foreign owners or private equity. Just like today’s Blue Labour government with its swingeing windfall tax on energy companies, the net effect has been reduced investment and reduced energy security. Short-term political posturing can exact a very high long-term price. Of course, the perpetrators have long since left office to make their fortune on the speaking circuit…