Can a government become a fund manager?
Most people would probably prefer Bernie Madoff to look after their investment than expect HM Government to pick shares. Yet a million employees will soon be asking the state to manage their investments.
From 2012 these employees will automatically be given personal pension accounts under the government legislation and this money will be managed by a state agency. They can opt out, but given they are being herded into the scheme because they have no corporate pension provision, most will hand over the money, not least because their employers will have to contribute at least 3 per cent of their pay.
Getting people into pension schemes is undoubtedly a good objective. With the employer payment and tax relief plus the employee’s own contribution, the equivalent of 8 per cent of pay should be going into the personal accounts. That won’t produce a fortune but it’s a good start.
But how will that money be invested by the Personal Account Delivery Authority, the state agency reporting to the Department of Work & Pensions? Leaving it in a bank account will not produce the returns necessary to pay a pension but investing in bonds or shares imposes a risk on poorly paid workers that they would probably not take with their own savings.
These low-paid workers are almost certainly financially unsophisticated and will, by default, go into the authority’s default fund – the not-too-risky, not-very-exciting fund.
Yet no fund is safe. The argument that all investment comes right in the long run no longer applies. Not only are shares bought two or three years ago showing a loss, equities bought in the late 1990s are under water after more than a decade.
Don’t expect the civil servants at this government agency to take any risks with workers’ money. But how will it explain to them that the cash taken off them over the past decade is now worth less than their contributions?
The government has already started down this dangerous path in the children’s trust funds that give all newborn a sum that is supposed to accumulate until they reach maturity. That is small fry however; playing with people’s pensions is serious.
A government trying to protect itself from criticism might have preferred to force workers into personal accounts but then make them choose from a range of commercial fund managers. By doing the investment itself, government is surely making itself liable to a stream of compensation claims when it goes wrong.
