May 30, 2018
It’s our money – use it
Roughly one in four people don’t have any pension provision other than the state pension. For many, that’s the reality of living in a low wage, gig economy – people just can’t afford to make the sacrifice. Nonetheless millions of people do make regular contributions and it’s estimated that there’s around £2tn sitting in our collective pension pot. What do the fund managers do with that money? Nothing particularly productive from the public good perspective, says Aditya Chakrobotti writing in The Guardian. Why on earth don’t we demand more? A good question.
You don’t need bankers to invest your pension. There’s a DIY ethical route.
Right on the doorstep of the world’s greatest financial centre sits one of Britain’s oldest council estates. Built in the 1890s, the Boundary is a beauty: Grade II-listed red-brick blocks radiating out from a circular garden complete with bandstand. Yet for the City of London, the estate’s tenants are as visible as the crofters of the Outer Hebrides.
The Square Mile’s financiers raise billions for big companies, but not a penny in loose change reaches the Boundary. Still, the estate’s residents are as enterprising as any of Lord Sugar’s apprentices. Visiting a fortnight ago for a fundraiser, I chatted to a resident with a first-class degree who’d built a successful social enterprise making sandals from reclaimed leather – and now trains other local women to do the same. The couple of grand needed to get going came not from the banks, but from Kickstarter.
Here, bankers were those aloof types who rented ex-council flats for more than £2,000 a month, but who barely spoke to their social-tenant neighbours. “Quantitative easing never came here,” says longstanding resident Philip Green, and I imagined what it must be like waking each morning to the slosh of millions outside your window and knowing they would only ever come your way to drive you out.
The finance sector gets bashed for bonuses. You hardly ever hear about how badly it does its job of investing productively in society
A week after that visit, Polly Toynbee wrote on these pages of how she’d been barred from the annual general meeting for Melrose, the vultures who have just bought the engineering giant GKN. In their hands, one of Britain’s last remaining big engineers will probably be stripped for parts while skilled workers in the Midlands lose their jobs. But some people are going to do just fine: even as my colleague fumed outside, shareholders voted through a £167m bonus for the four men at the top.
The basic role of financial markets is to turn savings into productive investments. You, a retiree in Berkshire, have 10 grand sitting idle; while I, a frustrated wage slave in Bangor, have an ingenious idea for my own business. Financiers bring us together and – hey presto! – you get a return, I start my company and the country grows a little bit richer.
This is the Ladybird version of events, but in both the above stories you can see how far short reality falls. Here is a City in which those at the top fill their pockets, yet seem unwilling or unable to put that money to better use.
“To see what is in front of one’s nose needs a constant struggle,” wrote George Orwell. For Britons, even 10 years after the crash, the finance sector is that thing so close as to evade perspective. It gets bashed for bonuses, for tax dodging, for reckless innovation. What you hardly ever hear about is the vital part: how badly it does its supposed job of investing productively in society. That, after all, is why the banks got all those bailout billions.
Yet over the 10 years from Tony Blair entering No 10 to Northern Rock’s collapse, over one in every three pounds – 36% – lent by banks and building societies went to other financial institutions, according to official figures analysed by Prof Sukhdev Johal of Queen Mary University of London. Just under 9% was lent on property – almost as much as the 9.7% that went to manufacturing and productive businesses.
Since the crash, minister after minister has exhorted the banks to lend more to the real economy. Deals have been signed, Bank of England schemes set up. Yet since 2008, 33% of bank loans have still gone to other financial institutions, with over 9% put on real estate. As for the share going to manufacturing and productive businesses, that’s dropped to 6.3%. So much for reform.
Britons entrust fund managers with more than £2.3tn of assets for our pensions, according to the Office for National Statistics, and another £585bn in Isas and personal equity plans, or Peps.
How much of that money – our money – goes into building the hospitals, railways and broadband infrastructure that we need? Not enough. That is not just my view, but also that of George Osborne. As chancellor, he spent years pleading with pension funds to invest more in building infrastructure, under the banner of “British savings for British jobs”. Unveiling his autumn statement in 2011, he said: “We need to put to work the many billions of pounds that British people save, in British pension funds, and get those savings invested in British projects.” Osborne boasted of an agreement with fund managers to “unlock” £20bn of cash. Four years later, one key result is the Pensions Infrastructure Platform, which has invested a grand total of £1bn. But what became of the other £19bn? Presumably it went the way of the “northern powerhouse”.
In 2012, around the time Osborne began haggling with asset managers, the eminent City economist Roger Bootle gave a lecture asking “what the great Victorian entrepreneurs would have done if they had been confronted by interest rates and bond yields as low as we have today”. His answer: “They would have rebuilt the world.” Well, 21st-century Britain boasts a financial system 10 times the size of its economy. It also has a longstanding housing crisis, and is rapidly being left behind by other rich countries on everything from broadband to green energy.
On the one hand, there are the social uses to which our money could be put and make a return; on the other, there is the hole into which it actually gets poured.
Alternatives to this broken financial system are scarce and small, but an interesting one is about to launch. It offers savers a chance to invest in building 30 affordable family homes and supported living flats in Kirkby, just north of Liverpool, that will be let to those stuck on the local council’s waiting list. The families who live in them will be on long-term tenancies. Your money goes into a three-year debenture, or IOU, which you can put into an Isa and that will pay 4.5% annual interest (versus a base rate of 0.5%). In this way, the £3.9m needed for building the site will be crowdsourced over the internet.
A small development for a relatively small sum on Merseyside, where nearly 37,000 households are on the waiting list for a home: all pretty straightforward, you might think. Not so. Developers normally build houses to sell – banking the money to finance the next project – while Octevo Housing Solutions plans to hold on to the houses for 50 years, before selling them to a housing association for a quid each. It was a bold idea and an exciting one, which chairman Robert Macmaster thought would win over the big banks and pension funds. “They loved the idea, loved the scheme,” he says. “But they kept asking: show us one you’ve built before.” The money managers judged it too risky. “They wanted the gravy; they just didn’t want to chop the vegetables or cook the meat.”
Octevo’s housing development in Seel Street, Liverpool, which will be a mix of affordable and supported living.
Seen from the pinstriped side of the table, Macmaster runs a small provincial builder with a novel business model that offers in the first instance only a few million in returns. Asking a big, bureaucratic fund to go through all the legal and technical hassle of getting on board with that – well, elephants can more easily be taught to play polo.
In the end he took the idea to an ethical investment platform. For the past six years, Abundance has been pooling small investors’ savings into tidal energy and geothermal power plants. Small, worthwhile projects that serve a public need but which don’t get funded through conventional finance.
“Finance wants us to think of money as something divorced from reality. It makes a return but you don’t need to understand how that return came about,” says Abundance partner Bruce Davis. “We want to make money real, tangible, political. To make people realise their money has power and that you have a power to exercise that.”
Last Wednesday, I toured an Octevo development in Liverpool city centre, a mix of affordable and supported living very similar to the one that will be funded by Abundance. On most new estates, you can tell the affordable bit: it’s smaller, meaner and sometimes comes with its own “poor door”, which keeps the social tenants away from the private occupiers.
Octevo’s James Ritchie told me how “most developers hate building affordable. Hate it.” Here, everything was affordable and the flats came with high ceilings and good-quality kitchens and bathrooms. Some even had roof beams that Ritchie had had to fight the council planners to preserve. The subcontractors, he said, were paid within two weeks – compare that to Carillion’s contracts on the never-never.
This is all different from the normal, but you can criticise it for not being alternative enough. The flats are set at 80% of market rent, meaning their tenants will most likely be reliant on housing benefit. While Octevo and Abundance talk of future projects using more green energy, the building work that starts this summer will be much more conventional. The flats will be let by a for-profit housing association, rather than the more traditional charitable equivalent. And of the £3.9m to be raised, Abundance is taking £200,000. If this is industry standard, then Abundance should think about whether it wants to play by the standards of the industry to which it is an alternative.
“It’ll do no harm, but it doesn’t set the pulse racing,” says Ronnie Hughes, who spent decades at one of the big Liverpool housing associations. “They could have been a lot more radical from the off: made the rent cheaper and gone greener.” And perhaps thought more about the development as a community in the making.
I hope that projects to come will have the subtle radicalism that Hughes is looking for. But for now, there’ll be 30 homes for families who would otherwise be in temporary accommodation. This kind of social or impact investment remains a tiny part of all the investment that happens in the UK. As a market worth less than £2bn, it’s beset by small-pool syndrome: the same names crop up on the same roundtables and taskforces and some of the investment celebrated as “social” should not be in the market at all. When companies are trying to monetise their ability to reduce homelessness, you need a strong stomach not to feel queasy.
But the conundrum remains. Britain has huge savings and a huge finance sector: it also has huge deficiencies in its infrastructure – everything from social housing to roads. Not all of that can be fixed out of the public purse, so what role should be played by private finance?
In big French companies, pension savers are offered the chance to invest 10% of their money in a fond solidaire, or solidarity fund, which supports unlisted social enterprises. In Britain, your average pension member doesn’t even get consulted on what values they’d like their money to support – whether fighting climate change or building social housing. Yet, rather than tackle those issues, the Labour party seeks to build a parallel finance system, in the form of a National Investment Bank, while other left economists talk about building a sovereign wealth fund, just as Norway has done with the proceeds of North Sea oil.
But we have a sovereign wealth fund already. It’s worth over £2tn and it’s called our pension funds. The big battle is to give us agency over our own savings, rather than leaving it all to some pinstriped manager on a fat commission.
Abundance’s Davis told me about his own portfolio, which includes a part share in a wind turbine. “I see it when driving up the M4, just above Bristol. It’s always windy, meaning it’s making me a good return. It beats listening to whether the FTSE has gone up or down today by 1.23 points.”