Making pensions work

Richard Murphy has a new report out, Making Pensions Work. And My God it\’s a stinker.

This is fun from The Observer.

Murphy, who is one of the country’s pre-eminent tax experts

We\’re screwed, aren\’t we, if Ritchie is the best the country has to offer.

Anyway, on to the report.

Using data for the most recent year available – 2007/08 – it shows that total pensions paid in that
year amounted to £117.6 billion. Of this sum £57.6 billion was state old aged pensions, £25 billion
was state employment related pensions paid to former civil servants and other former public
employees and £35 billion was private sector pension payments.
In the same year the total cost of subsidies to the private UK pension industry through tax and
national insurance reliefs on contributions made and from the tax exemption of income of pension
funds amounted to £37.6 billion. The result was that, albeit indirectly, the entire cost of private
sector pensions paid in 2007/08 was covered by tax reliefs given to the private sector pension funds
that paid them. To put it another way, every single penny of the cost of UK pension payments in
2007/08 was in effect paid by the UK government.

Err, no, sorry, but that conclusion is quite incorrect for two reasons.

The first is that the tax relief upon pension contributions is the tax relief upon saving for a pension: it\’s relief which needs to be accounted for against pensions which will be paid out in the future, not against pensions being paid out today.

The second is that tax relief upon pension contributions is not so much a relief as a deferment. Your pension that you get from your savings (yes, even the State Pension) is subject to income tax. Quite what the average tax rate on pension incomes is I don\’t know. Some people won\’t get enough to be paying any income tax, others will be getting the sort of sums that attract 40% (a very few will be in the new 50% bracket as well). If it\’s basic rate as the average, that\’s £23 billion coming back: if 40% (which it clearly isn\’t) then £47 billion.

Until we know that number we don\’t in fact know what the subsidy is. I\’d expect there to be some: tax reliefs being higher than income tax paid on pensions received but I\’m not certain about that at all. Anyone know?

Finally, I\’d love to know whether they\’ve accounted for the state employee pensions properly. I assume that contributions to these are similarly tax reliefed as private pension contributions: if so, how much of the £37.6 billion should be set aside the £25 billion of state employment pensions? A place where such a comparison would be appropriate given that most of them are pay as you go rather than fully invested funds?

Do note one lovely thing as well. Given that tax reliefs are for savings towards future pensions, Ritchie\’s assumption is that if more people save more for their own future, this is a bad thing. Because current reliefs will rise.

This isn\’t, to put it gently, the most sensible manner of considering the funding of pensions. More people saving more is bad?

Most importantly we suggest that if those pension funds are to attract tax relief in future they must
use a significant part of the £80 billion of contributions they receive each year to invest in new jobs,
new technology and new infrastructure for the UK so that the wealth that is needed to grow our
economy, to create jobs and to build the real capital base that must be passed to the next
generation is built on the back of pension fund investment.

Leave aside his ignorance of why we have secondary markets in investments at all and just consider what they\’re actually recommending here. Some portion of pensions savings must be in new things. New companies, new jobs, new products, new infrastructure.

Yup, they\’re insisting that part of your pension must be invested in venture capital. Might be a good or a bad thing but it\’s certainly an odd thing for someone like Murphy to be recommending.

Thirdly, we recommend that current pension deficits in final salary schemes be cleared wherever
possible by the issue of new shares in the companies responsible for those funds. This would stop
the current fruitless drainage of cash out of companies that should be used for real investment and
which is instead directed via pension funds into the stock market to buy shares in other companies,
the only benefit of which is to create a spiral of stock exchange boom and bust. We also suggest that
future contributions to such final salary pension schemes might also be paid, at least in part, by
issuing new shares in the companies responsible for those final salary pension schemes.

That is truly insane. Just about the one total certainty about pension investment is that you don\’t want both your job and your pension to be reliant upon the performance of the same company. This means that you absolutely do not want your pension fund to hold shares in your employer. We\’re trying to diversify risk here, recall, not concentrate it.

We really are truly fucked, good and proper, if \”one of the country\’s pre-eminent tax experts\” is going to recommend drivel like this.

Lastly we recommend that if enforced saving is to be required by the government then that
government has a duty to ensure that the funds so saved are invested for the common good.
Pension fund performance over the last decade has a been a history of almost perpetual loss making
despite the enormous subsidies that pension fund tax relief has provided to the City of London and
stock markets, all of which they have frittered away. Investment in local authority bonds for local
regeneration, or in bonds or shares issued by a new Green Investment Bank and in hypothecated
bonds e.g. to provide alternative funding to replace the inefficiently expensive Private Finance
Initiative for funding public sector infrastructure projects would have prevented those losses –
because all of these would have paid positive returns to pension fund investors. It is for exactly this
reason that we recommend that such assets be the basis for any new state pension fund in the


In another report that these two did (The Green New Deal) they insisted that long term bond rates should be lowered to 3%. Inflation is currently above 3%. So everyone holding such bonds would be losing, not gaining, money through holding such bonds.

Indeed, Murphy is on record as saying that we should have higher inflation targets: 5% I think he\’s mentioned. So everyone locked into 3% bonds gets screwed, don\’t they? For every £100 that a 25 year old puts in they get back £44.57 at age 65 in fact. What a great way to save for a pension!

It\’s also highly questionable to use a ten year time period to judge pension returns. Especially from the peak of a market like 2000 to the depths of a recession like today. Tsk, really, tsk.

To date pension funds have been an almost perfect example of what Keynes described as ‘the
paradox of thrift’ – saving that sucked demand and well being out of the economy. We need
something very different now. We need pension funds that can build economic will being for the
present and the future.

Oh dear. They\’ve not grasped the paradox of thrift at all. It isn\’t that \”certain types of saving are bad for demand in the economy\”. It\’s that at times, any sort of savings are bad for the economy, reducing demand. Whether such savings are made through bonds, shares, private pension funds or some new fangled method just devised by a retired accountant.

I mean, come on, if you\’re going to tout a long dead economist the least you can do is get this theories right.

What a perfect typo!

The misspelling of
personal pensions in the 1980s and early 1990s did not help either

Tee hee.

I think this is fun:

annual contributions exceeded
£80 billion

OK, that\’s the amount being saved into pension schemes each year. And from a document that they themselves reference:

Equity issues on the UK main market and AIm totalled £82.6bn in
2009, up on £70.7bn in the previous year.

So we seem to have some sort of balance then. The amount of new capital raised each year for companies is about the same as the amount being saved for pensions. Which makes all of their wittering about how pensions aren\’t being saved in productive assets a tad odd really. Perhaps pensions aren\’t being directly but the system as a whole seems to be directing that fungible cash to such activity.

This is simply nonsense.

As data published by the organisation promoting the City of London,
TheCityUK, showsxviii, the ten year rate of return on investment in UK stock markets was an average
loss of 2% per annum over the first decade of the twenty first century. This was also the global
average rate of return on shares in that decade.

They refer (again) to here. Where those promoters of the City of London give us the index returns for the major stock markets. That is, they give us the capital return (or loss) on holding shares. So, what is not included in their number then?

Yes, it\’s the dividend yield. Which, at least at some points for FTSE has been 3%. You know, enough to take total returns to equity positive?

The blinding stupidity of their argument here will be obvious if we apply it to bonds. We\’ll not count the yield at all, only the capital return? Which means that anyone and everyone ever investing in bonds will always make a loss for reasons of both inflation and that there\’s always some level of default.

Way to go guys, way to go.

The persistent purchase of shares by pension funds when the market was paying no return cannot


We also know that notionally some of the
tax relief given to employees on pension contributions goes to those who appear to contribute to
state ‘pay as you go’ pensions schemes – but only because they have to enjoy a comparable relief to
that which goes to those making contribution to private sector funds to ensure that the latter
appear attractive savings mechanisms.

OK, so they do mention what I pointed to above….but then go on to dismiss it. Ho hum.

Adopting the alternative ‘macro perspective
offers the second reason for private sector pension fund failure. This is the consequence of there
being no obligation on those funds to invest in a way that creates new economic activity. As was
demonstrated at the time of a previous pension crisisxxiii, 99% of all investment in corporate shares
and bonds made by pension funds is in what might best be called “second hand” shares or bonds
already in issue. The purchase or sale of such shares or bonds provides the issuing companies
nominally responsible for these assets with no direct benefit at all from their purchase. It was of
course true that when first issued such shares and bonds would have provided funds to the company
that issued them, and whose name they bear, but thereafter whenever they are bought and sold –
as they are day in, day out by pension funds – not one penny of the money traded goes to the
benefit of that company. Instead all of it goes to the previous owner of the share or bond in
question. That may be a pension fund, of course, but the point is that none of this speculative
activity does in any way benefit the productive economy. As such a pension funds purchase of these
assets creates no new investment or employment opportunities. In economic terms these pension
fund “investments” are, therefore, savings activities and not investment activities.
In contrast only about £100bn, or about 12% at most, of pension fund holdings are in government
securities. This represents a considerable investment portfolio imbalance which fails to reflect the
proportionate roles the state and private sectors each play in the economy when the state as a
whole accounts for more than 40% of GDP.


The existence of the secondary market allows both people to cash out their savings so as to create, say, an annuity when they retire and also allows maturity transformation. That maturity transformation allows companies (and, of course, the government) to get the necessary capital at lower costs than would otherwise be the case.

Seven reforms are needed.
Firstly, the state has to guarantee an old age pension that keeps all older people in this country out
of poverty irrespective of their fortunes during their working life, their gender and their relationshipstatus. This means a commitment to increasing the basic pension and enhancing pension credits is

Wondrous. Pension credits dissuade people from saving for a pension. If you save and earn a low pension and the other bloke doesn\’t save and gets pension credits, then why would you save to earn a low pension?

Second, if tax relief is to be given to pension fund contributions then there must be conditions
attached to doing so. To secure this tax relief in future we recommend that a significant part of
those pension fund contributions (we suggest at least 25% of them, and maybe more) must be
invested in new economic activity and not in the buying and selling of shares and bonds which
provide no new money for the real economy. This means pension funds must be proactively used to
create new capital assets, infrastructure, skills and job. In addition, pension funds must be required
to invest for the long term and to minimise the transaction costs at present paid every time a stock
or bond is bought or sold. This means that funds should be required by law to invest strategically as
business partners and not speculatively for short term gain, a role that is in any case and inevitably
in conflict with their long term duty to produce returns for their members.

They\’re handing the entire pension industry over to private equity and venture capital. And, err, without that secondary market how do they cash out the value created in order to pay the promised pensions?

I mean, Murphy and Hines do know that an annuity eats the capital, don\’t they? That it isn\’t just the returns on capital, it\’s the very capital itself as well?

Fourth, in pursuit of these objectives pension funds must seek to undertake new forms of
investment. It is very obvious that the existing profile of their ‘investments’ (which are actually
savings) carry inherent speculative risk which makes them unsuitable for long term pension saving
purposes whilst providing considerable opportunity for excessive charges to be made by the City of
London, which is contrary to fund member’s best interests. If pension funds were instead genuinely
invested in local authority bonds for local regeneration, or in bonds or shares issued by a new Green
Investment Bank and in hypothecated bonds e.g. to provide alternative funding to replace the
inefficiently expensive Private Finance Initiative for funding public sector infrastructure projects then
this situation would be changed, quite radically. What is more these alternative investments would
not only create jobs in the UK economy, they would also have life spans that will suit the needs of
many pension fund managers and their members because the investments will earn revenue over
periods of up to twenty five years and more before returning capital when required by pension
funds to provide annuities.

Erm, riiiight. So that 40 year old saving for his pension is fine. He\’s investing for 25 years. What about the 58 year old still saving for his pension? He\’s only got a 7 year horizon to invest before he purchases his annuity and, erm, in the absence of a secondary market he\’s screwed, isn\’t he?


Murphy\’s ability to write reports hasn\’t improved, despite all the practice he\’s getting, has it?

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7 thoughts on “Making pensions work”

  1. “Murphy, who is one of the country’s pre-eminent tax experts”

    He’s managed to persuade just about every media outlet, especially the Guardian/Independent/BBC faction, that he knows what he’s talking or writing about.

    The Sunday Times this morning had him down as “a forensic tax accountant”.

    He’s becoming as dangerous – and as seemingly fireproof – as Grigori Yefimovich Rasputin was to the Russian monarchy.

  2. mmm…so the last governement basically forced pension funds to duivest from equities in a falling amrket and invest in bonds because oif the secure income stream. Murphy propose they invest in venture capital! Is this man sane?

    However, it sould be noted tht most of the “tax subsidy” goes into paying the fund fees…even tracker pension funds seem to underperform the market

  3. To me, one of the things that appears to have been further garbled between RM and “The Observer” is the introduction of the “baby boomer bashing” trope.

    The subsidy to private pension savers that can be withdrawn without raising problems of retrospectivity is income tax relief on new money being invested, rather than CGT relief on money already invested. For this reason, a practical attempt to implement RM’s proposals would be very likely be highjacked by the baby boomers to improve their relative position still further.

  4. Murphy is actually becoming quite dangerous.

    As GeoffH has said above, through sheer bloody minded persistence (and the fact that he seems to have nothing else to do) he has managed to persuade a good chunk of our credulous, lazy 4th estate that he actually knows what he is talking about.

    His nonsense is starting to assume a degree of momentum. Even John Redwood met him as if he were some sort of expert.

    It is pretty distressing because his analysis is so bad and his policy ideas so insane that were any of them ever implemented we would end up back in the Middle Ages.

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