Pension and Insurance Funds (Investment)

Part of the debate – in the House of Commons at 12:00 am on 12th December 1975.

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Photo of Mr John MacGregor Mr John MacGregor , South Norfolk 12:00 am, 12th December 1975

I should like to express my thanks to the hon. Member for Darlington (Mr. Fletcher) for giving us the opportunity to debate a subject on which there is a degree of unanimity and on which many misconceptions have been corrected.

I wish to declare my interest as a director of a bank. I am not directly involved in this area of activity, but certain sister companies are concerned with the investment management of pension funds, in giving advice to pensions funds managers and also in trying to improve communication in terms of the employment of future beneficiaries of pension funds.

I wish to take up the point mentioned by my hon. Friend the Member for Mid-Sussex (Mr. Renton), who asked why investment had not taken place and why City funds had not gone into industry. I remember the situation clearly since I was an executive in a bank during the period 1971–73. Because of the encouragement of easy credit by the then Government, there was an enormous amount of money, both long-term capital and short-term bank money, available to go into industry. However, that did not happen as the then Government would have wished because there was not the demand from industry.

I agree with my hon. Friend about the importance from an industrial point of view of making sure of a return on investment to cover costs. We should look in terms of comparison at European countries. For example, in Germany, the Horst Company arranged for long-term issues over a period of 10 years, whereas ICI had no such arrangement. It is true to say that ICI could easily have borrowed in the United Kingdom capital market at any time it wished to do so, but that company did not wish to go for those funds.

It is clear from what happened that the real impetus comes from industry rather than from the financial institutions. Long-term capital indications show that new issues to date this year amounted to £1,234 million, much of which went into industry. That proves that there is no reluctance on the part of the City to invest its funds. Similarly, there are many banks who would be willing to lend more to industry if industry wanted the money. But when there is liquidity in industry the banking system is under-lent to industry—not of the banks' own choice but because the demand does not exist.

We must ask why there has been such a low demand for investment and investment funds. Many reasons have already been given in this debate.

My hon. Friend the Member for Mid-Sussex was right to concentrate on the question of low return. A skilled actuary who has spent many years in the investment and management of pensions told me that the relationship between returns on new investment in the industry and the true assets of the industry throws up a return of 4 per cent. That is different from the yield because the yield relates to market values. I am trying to look at the underlying asset situation. When inflation is running at 25 or 26 per cent. a figure of 4 per cent. is totally inadequate. Because of a lack of return and lack of profitability and of confidence in industry, the markets will be affected. We may return to the situation of 1971–73 when the then Government, for good reasons, over-inflated money supply. They were trying to instal some confidence in the industry. The oil crisis caused a reversion of the process, but we saw in 1974 the effect of the policies undertaken in the period 1971–73. We were committed in 1974 to the fact that we had the highest investment in British industry since the war. We also had to face a poor industrial relations record, manning problems, and in many cases poor management. Furthermore, price controls and an over-swollen public sector had their effects.

What came out of all this is now well known, and only a small part of the blame can be placed on the banking institutions. Just as there is no point in pumping money from an industrial point of view into investments that will not earn a proper return, there is no point in banking institutions pumping out money when there is no demand.

The Minister of State said that the financial institutions were trustees of the beneficiaries of funds. They are trustees, and that must never be forgotten. If anything, we have underestimated the number of men and women who are involved in these funds throughout the country. The figures issued by the Royal Commission on the distribution of income and wealth in the second report show that up to 11 million people are covered by occupational pension schemes. In addition there are 2,250,000 taxpayers receiving pensions who are covered by these funds, and there are also 14 million taxpayers who save through life assurance. Admittedly, there is some overlap, but it is clear that we are talking of well over half the ordinary employees of this country.

This is absolutely critical to the present debate. If there were political or Government direction of these investment funds it would mean that the Government would dictate to managers of pension funds to put their money into specified forms of investment which would give a lower return than those managers are seeking. That means that the pensions funds would either be unable to meet their liabilities or the contribution rates of both the companies and the existing employees would have to be increased.

If a pension fund is forced to invest totally at 4 per cent., when its actuarial requirements are well above that, there are two possible options. Either the employees and employers will have to dig more deeply into their own pockets or the company itself may very well find that it must reduce its overall pension scheme—or even, in some cases, go bust. Therefore, I believe that the importance of thinking always of the beneficiary is overriding.

Concerning the flow of funds, although, as the Minister of State correctly said, it is impossible to analyse exactly what proportion of the institutional funds go into industry, I believe that it is very much more than the hon. Member for Darlington tried to make out.

The money from pension funds themselves cannot go abroad directly, because of the application of the investment dollar premium. It may be that some will go indirectly, by direct investment from the industries into which pension funds have invested, but fundamentally pension fund investors can invest only in the United Kingdom. If they have invested abroad through the dollar premium, someone else has had to liquidate the pension funds' own investments to enable the pension funds themselves to invest.

It means, fundamentally, that the funds are all going into the United Kingdom somewhere. They can go into the banking system to a limited extent—and, if so, the funds are then transmitted either to the Government or to industry—or the funds can go direct to Government through gilts. That means that they are being directed partly again to industry, through the various grants, but also to the many desirable things to which the hon. Member for Darlington would like them to be applied—social services and so on. Or again, they can go to industry through rights issues—we have seen many of these this year—or into property, but only a small proportion of the funds has gone into property, and much of that is industrial property. I believe that a very much larger proportion of the pension funds than the hon. Member thinks in fact finds itself in one way or another going back into industry or commerce.

Next I come to political direction, which I think is at the back of much of the thinking which leads to motions of the sort we have had today. I believe that it is much better to have diversity of decision making in the investment of funds. I am equally concerned if there is too much concentration of decision making in the hands of the Government.

Are we to say that there is a superiority of skills, a greater collective wisdom, in the Government? Are they, with their Civil Service advisers, with all their experience in other directions, the best equipped to make many of these investment decisions? Are the skills in this House superior to the judgment of thousands of professionally skilled people, who spend their lives exercising their commercial judgment on behalf of the pensioners whose funds they are advising, and who accept responsibility if they go wrong?

In my experience the vast majority of them weigh each of their investment decisions very carefully and exercise their responsibilities in a wholly responsible and concerned manner. If they do not on some occasions commit their funds to industry, it is not because they do not believe in the importance of investment. It is either because of the lack of demand to which may of us have referred because they do not consider the investment viable, or because there are better returns to be had elsewhere.

Of course, mistakes are made, as by a number of investors and banks during the 1971–73 property period. But let us be quite clear that, equally mistakes can be made on a very big scale by Government investment. We need only look at the situation at the present time. Investment decisions are being taken on what most people in the City would regard as overinflated ideas of the future demand for cars. Vast sums of money are being committed on grounds equally as mistaken as those on which the property investment was based two or three years ago.

If the rumours of a £200 million investment in Chrysler are correct, we have a clear example of why we do not want Government direction of vast funds on this scale. If I believed that the Government were directing pension funds of which I am a beneficiary into Chrysler on the scale of the suggested £200 million, I should feel that that was a gross mismanagement of my own savings.

I have two points to make in this respect. The first is that I do not believe that the skills which exist in this House and in Whitehall for investment into profitable industry are any greater—they are probably a great deal less—than those that exist collectively in the financial institutions.

Second, I believe that the investment will be subject to short-term political pressures at the expense of long-term economic benefits and the interests of millions of people in their capacity as pensioners or prospective pensioners.

However, I accept that there are problems, and I believe that, rather than publicly-directed investment in pension funds, there must be greater public accountability. I agree with the remarks of my hon. Friend the Member for Somerset, North (Mr. Dean). I should like all pension funds to publish their accounts so that we can see the areas in which they are invested.

I wish to make a few remarks on the Equity Investment Corporation and the objective of instilling a degree of better management into ailing but not completely defunct companies to which public funds are directed. I greatly welcome this development. I hope that it will be one of the objects of the Equity Investment Corporation. In the past individual pension funds and life companies have resisted the temptation to do this because of the difficulties, but we should not underestimate the difficulties which the corporation will face in doing it as it will require people of high quality and great skills to get it right. That indicates the difficulty of working for Government direction of investments, because one is dependent on the same small pool of high quality people.

I wish to deal with two points which have not been made today but which, to my mind, constitute the real problem facing pension funds. The first is the impact of inflation on pension funds and the beneficiaries, and the second is the importance of dividend control. I am glad that the Minister of State is present because I hope to make a case to him on behalf of the pension funds about dividend control.

Let me deal first with the question of pensions and inflation. The hon. Member for Darlington said that some companies are setting aside 43 per cent. of their wage and salary bills for pension purposes. The hon. Gentleman was slightly amazed at that figure. Many companies are contributing between 25 per cent. and 43 per cent., partly because they are good employers and are trying to ensure that their employees receive the best pensions possible, and partly because of the effects of high inflation.

In the past few months, Lloyds, National Westminster and Barclays Banks have had to put an extra £10 million into their pension funds to meet actuarial requirements because of inflation. The National Commercial Bank has had to increase its pension provision from £11·4 million a year ago to £17·6 million today because of high inflation and the pensions it is likely to have to pay. The discussion in the House about rates of inflation usually concentrates on the situation of housewives, local authorities and others, but there is equally great danger for pension funds if inflation continues at the present rate because either they will not be able to meet their actuarial requirements or the contributions from current profits which they will have to make will be such as to reduce those profits very substantially.

I conclude with making a few remarks on the question of dividend control. I have asked many pension fund managers, when the market value of many of their capital assets was low, to what extent did this worry them. Usually I am told that the removal of dividend control is much more important, because what matters to the pension fund is the income. If the income from dividends is substantially held back, they will inevitably have to look to investments other than industrial investments and equities to keep up their income to meet their commitments.

Report No. 2 of the Royal Commission on the Distribution of Income and Wealth is peppered with strong arguments for the abolition of dividend control. I do not wish to go into detail on them because of the lateness of the hour, but perhaps I shall be allowed to quote paragraph 313 in the Report which states: The National Association of Pension Funds said in evidence that the greatest element of risk to future pensions was that investments would fail to produce the income yield expected of them. In a period when the yield from dividends over the past 10 years has risen by just over 40 per cent., when the retail price index has risen by more than double that, and when incomes have risen by an amount approaching 150 per cent., it is clear not only that the dividend holder has had a raw deal but that there is here a dangerous situation for the pension funds. It will be seen that the arguments about dividend control are completely different from those about price and pay control. I hope that the Minister will look seriously at the impact of dividend control on pension funds in the next two or three years.

In short, we must look for reasons other than those which the hon. Member for Darlington gave as to why industry does not invest and why funds are not put forward. The problems of inflation and dividend control are the key problems for pension funds at the moment. I warmly support the hon. Member in his desire to see greater accountability of pension funds but I believe that the trend towards Government direction of those funds is wholly misconceived.