Whenever a socialist government gets elected, they think they can improve the economy by interfering in the decisions of capitalists. The current thinking seems to be that pension funds will be the next target with defined benefit pension schemes being encouraged to invest in big infrastructure projects covering transport, housing and energy.
This might be extended to target ISAs and SIPPs. ISAs hold as much as £750 billion but a lot of it is in Cash ISAs which don’t contribute much to the economy in terms of financing businesses. In total UK pension schemes, including SIPP pensions, hold a vast amount of assets, totalling over £3 trillion. This is a very attractive target for any Chancellor.
ISAs have been very successful in attracting savers because of their tax-free status and simple administration. SIPPs have also proved attractive in pension savers who want more control over their pension funds. It would be a shame if there was interference in these successful models. But the government apparently thinks that more of the money should be directed to financing UK companies. At present there are few explicit limits on what ISAs and SIPPs can invest in. And it is difficult to see how such limits can be imposed when investment trusts and funds which are listed or registered in the UK can pick from any listed companies worldwide.
The big issue for individual investors is whether the government should be interfering in the investment decisions of savers. The assets held in ISAs and SIPPs should not be diverted at the whim of civil servants or politicians who have proved to be incompetent investors if you look at history – British Leyland is a great example.
If investors wish to invest in the US economy instead of the UK’s – why should they not? This has proved a very successful investment strategy in the last few years mainly because US companies are better managed and operate in bigger markets.
Any wise investor does diversify investments geographically even if by doing so they expose themselves to currency exchange rate variance. Pensions in particular are long-term investments. The world economy might look very different in 30 or 50 years’ time so backing UK businesses may be perverse when Chinese companies might be dominant.
SIPPs are a particular issue because most SIPPs are written in trust. They are not owned by the investor in them but whoever is named as the beneficiaries. Government interference in where the money is invested breaches the fiduciary duties of the manager, whoever that is.
The key question is: “would diverting pension funds into infrastructure projects actually provide a good return?”. That is a very difficult question to answer and the answer might change over time. But if such projects do provide a good return then there are plenty of funds willing to invest in them and take any risks associated with doing so. They do not need the government to start interfering.
Roger Lawson (Twitter: https://x.com/RogerWLawson )
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