But there’s a second reason why this is also guaranteed to fail. As the FT noted yesterday, stock markets are dire at picking out which investments to pick. Just over 10% of all active stock market managers beat the market in 2014 in the USA. Randomly you would expect half to do so. That has not happened since 2009. And that’s before paying for the costs of these managers who get their judgement on which intangible assets to invest in (because that’s what most company shares represent) so spectacularly wrong.
What is more, of the best 25% of fund managers in 2010 almost none remained in the top 25% in 2014. So getting this selection right once is no guarantee at all of doing it again.
In that case investing in intangible assets makes no sense at all for pension purposes.
But requiring pension funds to invest 25% of all their contributions in infrastructure that creates new jobs in exchange for the tax relief they get would not just be good for the economy – which would be beyond dispute as it would give a £20 billion boost each year – but would also be fantastic for the stability of pension fund returns whilst seriously cutting the costs of pension fund management. And it would also respect that fundamental pension contract between generations.
But the City will fight it tooth and nail. Which is why, no doubt, such a radical, and essential, pension reform is not on the political agenda right now. Feeding the myth of the City is more important, of course.
Pension funds do invest in infrastructure projects of course. And they also invest in bonds. And the interesting question is really, well, which of the three investments makes the most to pay those future pensions? The general result is, I believe, that bond funds offer greater security and lower returns than equity funds……which rather blows a hole in the analysis there, doesn’t it?