Ben's blog and articles

The “pushmi-pullyu” in the 1967 film of Doctor Dolittle was a double-headed llama, with one head facing forward and the other back. Pensions policy in the UK in recent years has borne a resemblance to this contradictory animal.

In 2012 the government introduced a “nudge” to encourage people to save for their retirement. Rather than relying on workers to sign up to occupational pension schemes, the legal default became that everyone gets enrolled unless they deliberately opt out.

And all companies, above a certain size, also had to offer a scheme. The result has been a surge in retirement saving, with the number of active pension scheme members up from 8 million in 2012 to 15 million in 2017.

Some criticised it as intrusive paternalism and a red-tape burden on firms. To most, though, what matters is that it worked.

Yet George Osborne introduced a lurch in the opposite direction in 2015.

The former chancellor, out of nowhere, decided that the rules around what people could do with their accumulated pension savings were too restrictive.

“People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances,” declared Osborne.

He gave the over 55s the freedom to cash in their pension pots and to do what they like with the money, scrapping the requirement for them to transform it into an annuity (a contract with an insurance company to give them a guaranteed annual income for life).

But what if they made bad choices? That’s up to them, was the government’s answer.

“If people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice,” chirped the former Liberal Democrat pensions minister Steve Webb.

From paternalism to libertarianism in just three years. From “push me” to “pull you”.

People may not be buying Lamborghinis. And mercifully there’s no evidence thus far that people are frittering their money away, although they don’t seem to be doing much shopping around before putting their money into investment funds which is rather ominous and some are just keeping their money in low interest rate cash savings accounts.

Yet one thing they certainly aren’t doing is buying annuities. At least not in the volumes they used to. The proportion of people who access their pots buying annuities has collapsed from 90 per cent to just 12 per cent.

Why? Well it could be because they want to spend the money on an expensive one-off purchase – such as property – something they couldn’t do if they bought an annuity. Perhaps with annuity rates low by historic standards they think they’ll get better returns from investing their pension pots in stock market funds.

Yet new research from the Institute for Fiscal Studies published last week, based on survey evidence, suggests a big part of the reason is that people are under-estimating their own likely longevity.

They are choosing cash or shares over annuities because they don’t think they will live long enough to get good value from an annuity, even though many would. In simple terms, a great many people seem to be making a financial mistake.

It’s clear how this could be storing up problems for the future: those who run out of pension savings in old age will have to fall back on state support, making life more financially uncomfortable for themselves and also imposing a greater fiscal burden on future taxpayers.

One can see how an ideological battle could be joined over this. The libertarians would fetishise “freedom” while the left would argue people need to be protected from themselves.

Yet people are more complex than the terms of such a squabble allows. Yes, we want the freedom to occasionally make mistakes. But we also grasp that sometimes a more complete autonomy can be found within a framework of guidance, even at times compulsion.

There is a tension between freedom and protection – especially when it comes to financial services, where the consequences of decisions often don’t materialise for many decades.

Should the great pension liberalisation be reversed? Should we embrace push me, rather than pull you? Whatever the answer to that, one obvious imperative is to start furnishing people with good and accurate evidence on how long they are likely to live for.

#annuities #nudge #pensions

If capitalism is defined by the question of who controls capital – the money that makes the world go around – there’s one organisation that has perhaps more influence over modern capitalism than any other. That company is BlackRock.

The American-founded investment company has total assets under management of more than $ 6 trillion (£ 4.6 trillion), bigger than any competitor.

BlackRock owns – on behalf of its millions of pension fund investors – a portion of just about every publicly-listed company in the world. And often a sizeable one. It invests in trillions of dollars of debts of global governments and company bonds.

So who runs this leviathan? Well, to some extent it’s on auto-pilot. A hefty chunk of these assets are held in tracker funds, which simply passively “track” stock markets. But BlackRock also has hundreds of active fund managers, who select companies for their portfolios based on various criteria.

And what’s their ethos? The answer, if you’re used to hearing about the endemic short-termism of the world of finance, might surprise you.

Last week Larry Fink, the chief executive and founder of BlackRock, published his annual letter to the chief executives of all the companies around the world in which it invests last week. And Fink’s message was: don’t put profits first. Put “purpose” first. “Purpose is not the sole pursuit of profits, but the animating force for achieving them,” Fink explained. “Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked.”

This corporate purpose, he went on, means investing for the long term, serving a community, developing the talents of a workforce. And so on. BlackRock also says that bosses’ pay should not rise faster than that of the firm’s workers and has threatened to vote against remuneration committees that agree to excessive awards.

It’s enough to make the libertarian epigoni of Milton Friedman, the economist who famously asserted “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits”, choke on their cornflakes.

But purpose is often easier said than delivered in the business world. Sacha Romanovitch was the chief executive of Grant Thornton, the first woman to run a major accountancy firm. She attempted to restructure the company to have a focus on (in her own words, but words that might also have come from Fink) “profits with a purpose”. This meant dropping some questionable clients and sharing profits with all staff rather than just top partners. She capped her own pay at 20 times the average in the firm.

It ended badly. Romanovitch was essentially defenestrated by other Grant Thornton partners last autumn.

An anonymous memo of discontent leaked to the media claimed she was following a “socialist agenda”.

But is Romanovitch’s brand of reform really “socialist”? And even if we call it that, is it really something to fear? Among successful German “Mittelstand” companies – small and medium-sized family manufacturing firms – the kind of practices introduced by Romanovitch have always been normal.

Klaus Fischer, the owner of a firm near Stuttgart that makes wall plugs and car parts, insists that happy workers come above profits. “I’ve always been driven by the urge to be jointly successful with my employees, not just alone,” he told the Financial Times recently.

And there’s some evidence from the UK and the US that “shared capitalism” – where firms pay employees, in part, on the basis of performance of the overall enterprise or workplace – is associated with faster productivity growth within the organisation.

We often hear about Jeremy Corbyn’s supposedly backward-looking “socialism”. And Labour’s plan to compel larger firms to distribute a tenth of their equity into special funds for workers has been dismissed in some quarters in those terms.

But it’s worth thinking a little harder about what socialism means in the context of 21st-century business and finance. Perhaps a dash of that broader purpose-over-profits ethos is not as antithetical to successful business practice as we’re often told. Perhaps it could actually be a benefit. The world’s biggest fund manager, for one, seems to think so.

#LarryFink #socialism #SachaRomanovitch #capitalism #Blackrock

“Fiscal illusion” sounds like the kind of thing Derren Brown might do to your wallet in front of a packed theatre.

But actually, fiscal illusions are what perturb experts at places such as the Office for Budget Responsibility and the Institute for Fiscal Studies.

They refer to various official statistical artefacts and quirks exploited by ministers, such as the fact that student loans or spending on private finance initiative construction projects don’t show up in the national deficit.

But could there be a fiscal illusion to make those look like trivialities? Could the greatest fiscal illusion of all be the idea that reducing elevated levels of public debt should automatically be a priority for governments? Olivier Blanchard is one of the world’s most respected macroeconomists and the former chief economist of the International Monetary Fund.

Giving the annual American Economic Association presidential address last week, Blanchard argued something along those lines.

Put simply, his thesis is that if the market interest rate at which a government can borrow is lower than the economy’s expected growth rate, there is little social cost from the debt because the government can simply roll its borrowings over when they come due – without having to raise taxes or cut spending and without risking a dangerous debt spiral.

Blanchard noted that the US government can currently borrow for 10 years in financial markets at around 3 per cent a year, but that America’s projected nominal GDP growth rate is higher, at around 4 per cent.

The gap is even bigger in the UK, where our own government can borrow for just 1.3 per cent but the expected nominal growth rate is 3.6 per cent.

When one considers the positive impact on growth of higher government deficits in a time of private sector retrenchment (and the negative impact of over-hasty deficit reduction) the Blanchard finding becomes an even more significant result.

“The welfare costs of debt may be small or even altogether absent,” he suggests.

These are not entirely novel arguments. Many economists have made the related point in recent years that a government can stabilise its debt pile so long as the deficit as a share of GDP does not exceed the trend GDP growth rate – and that it’s not necessary to eliminate borrowing entirely to achieve this, despite what some politicians insist.

But the fact that these points are being advanced from one of the most influential pulpits in the world of academic economics is significant.

It’s important to stress what Blanchard is not saying. He isn’t arguing government debt levels never matter or that politicians can always happily borrow and spend without limit. Interest rates may rise. Trend GDP growth rates may fall. Borrowing to spend on white elephants is inherently wasteful.

But his analysis suggests that politicians, their advisers and civil servants need to have a much more sophisticated appreciation of the costs and benefits of government borrowing for the welfare of the population. They need a far more nuanced approach to fiscal policy, one that takes into consideration interest rates and the condition of the overall economy.

The issue of public borrowing has shaped American and European politics over the past decade. Their influence in the UK has been especially profound. The coalition government successfully created a grossly misleading narrative that the spike in the deficit in 2009 was due to Labour profligacy (rather than the recession) and that its austerity policies were the only possible remedy.

When the former Labour leader Ed Miliband forgot to mention “the deficit” in a speech before the 2015 general election, he was beaten up by even the non-partisan sections of the media for neglecting what was widely seen as the most important issue of the day.

But if Blanchard’s analysis is right, it was a justified omission. The national debt just doesn’t matter as much as we’re led to believe.

#AmericanEconomicAssociation #debt #deficit #OlivierBlanchard