Saturday 25 November 2017

Public ownership and UK pension funds

So, Labour is back in the game of public ownership. Various targets are now talked about for potential nationalisation, or something like it, including rail, the Royal Mail and utility companies. One of the interesting things about Labour's discussion of public ownership is the way that the amounts the currently privatised operators pay out to shareholders. The point being that under public ownership this money could be invested, not distributed to investors.

At this point, someone will almost always point out that those shareholders are the UK public. So we'd be knackering our pensions, and therefore we're not being smart by suggesting that some mysterious group of "shareholders" will bear the pain.

What I haven't seen, so far, is any kind of proper working through of these points. So I thought I would blog a few thoughts of my own.

1. The UK public's exposure to the companies that might be nationalised is likely to be higher than some in Labour hope, but lower than their opponents pretend.

I've seen the figure bandied about that only 3% of shares are held by UK pension funds (so nationalising companies wouldn't hurt them too much). I think this comes from ONS data on share ownership and on the face of it makes a basic mistake. I think this may be the % of shares held directly by pension funds, or easily identified as being held by them.

A quick review of the share registers of some of those companies on the target list will show you that you can get up to a couple of percent of shares held by pension funds very quickly. But this overlooks all the pension funds that invest via pooled funds, especially the big index funds run by the likes of L&G, BlackRock.

However, that said, it is undoubtedly true that ownership of UK PLCs in general has become more global. This is picked up in both the headline stats and the share registers. In particular there is a lot of US money. No doubt some of the money managed by Vanguard, T Rowe Price, Oppenheimer etc is run out of London for UK clients, but the large bulk of it is not. There's also quite a bit of Europe ex UK money in there these days too. You'll always see Norges Bank in the mix but also French, German, Dutch, Swedish asset managers, pension funds, and insurers.

I think all we can really say is 3% in not realistic, that overseas ownership is high, but that's about it. Someone needs to get into the detail now.

2. The nature and level of UK ownership will vary significantly by company.

It's obviously not an homogenous group of companies. To take two examples - SSE is still a publicly traded company and has a diversified shareholder base. There will undoubtedly be numerous UK pension funds that hold shares, though most won't have a significant holding. On the other hand Thames Water is privately owned, and mostly by overseas investors - though note that Hermes is a major player. So if you nationalised SSE (assuming this means compulsory purchase of equity) you'd likely have a small impact on a lot of UK pension funds. If you nationalised Thames Water you'd have zero impact on most UK funds, but hurt those that do have holdings harder.

3. Who will really bear the cost?

So if the government does buy out the current investors, and those investors feel they aren't getting a fair price, who will actually bear the cost? Well, in a DC scheme it will be you, the member. You shoulder the investment risk, so any loss eats into your assets. Bear in mind that the better off amongst us will have more exposure to equity-based savings, so in theory take a larger hit. But equally there will be more lower earners in total who take a hit.

In the the remaining DB schemes it should be the employer that takes the hit, assuming it isn't large enough to affect funding and lead to a change in benefits. Theoretically we could say it will hit the shareholders (where relevant) in the sponsoring companies, but in practice I doubt it will be meaningfully felt.

4. Will they feel it?

The first "they" is "the pension funds"  i.e. the trustees, sponsors etc.
This is an unknown. We don't know how much the government would be willing to pay to take the companies into public ownership (valuing the shares would split open the question of what shareholders actually "own"). I'm not smart enough to do this bit I'm afraid (I hope someone else in my party is doing it though!)

What we can say that pension funds that have a large exposure to all the companies would feel it the most. Equally those that have only an index-tracking exposure might not notice much. I'm reminded of when BP tanked after the Gulf of Mexico disaster. It was the biggest stock for many UK funds and responsible for something like 12% of all dividends paid by the FTSE100. But the (then) NAPF put out a statement saying it wouldn't have a meaningful effect on pension funds. It must be the case to have a group of stocks all losing value will have a worse impact, but it will depend a lot on diversification.

The other "they" is the scheme members. As above, DC scheme members will see the value of their assets affected if they have exposure, but again will depend on the number of companies held and the extent of holdings. But even so, at the risk of being cynical, I doubt most members will pay much attention. There is little member engagement with pensions in general and investments specifically, so my gut feeling is that this will pass many by. Bear in mind that UK PLC took DB pensions away from huge numbers of private sector workers without a generalised revolt.


If Labour does get elected, and does go ahead with nationalisations, we should be aware that - depending on how shareholders are compensated - this will have an impact on UK pension funds. It will vary significantly by fund, but it's daft to pretend that the impact is not there. Equally, we should not let the Right (especially the Right media) get away with pretending that this would represent some sort of apocalyptic assault on UK pensions since a) in some specific cases the impact would largely be felt by overseas investors (though these include workers' pension funds too!) and b) it might not be that significant.

If we are serious, then effort needs to go into mapping all this, preparing the ground, and considering any compensating policies that pension funds might favour. And we should be prepared for a huge Mail, Telegraph scare campaign.