Rachel Reeves used a portion of her Mansion House speech to announce the collectivisation of UK pensions.
The aim is to extract money from pension schemes into new, state-controlled megafunds, and spend members’ money on ‘critical infrastructure’, and ‘exciting new businesses’.
‘Exciting new businesses’ is code for the types of high-risk, high-failure-rate start-ups that the Future Fund – run by the British Business Bank – has lost so much money on.
It is ironic that Reeves should be so keen on ‘exciting new businesses’ when she has already done so much to cripple the UK’s existing businesses: higher Minimum Wage, increased Employer National Insurance, more tax on Capital Gains, more Inheritance Tax if there is anything left by that stage.
YOUR HELP IS NEEDED: If you’d like to contribute to uncovering the ongoing costs of PFI in your region, please email robert.lyddon@cantab.net. Together, we can expose the real price of these misguided policies and ensure the public understands the risks before it’s too late.
‘Critical infrastructure’ may embrace some road and railway projects (in Labour-controlled areas, of course), but principally it is code for Ed Miliband’s Net Zero projects. The pension money will be ‘crowded in’ – to use a favourite phrase of Reeves – alongside Reeves’ ‘borrowing-to-invest’ in Great British Energy and the National Wealth Fund.
Neil Record in the Daily Telegraph, in his article on 15th November entitled ‘Pensions Reform is Rachel Reeves’ latest swindle’, demolishes the assumptions upon which Reeves’ Mansion House speech is based. Reeves, as Neil notes, wants the government (i.e. her) to be ‘directing or ‘encouraging’ investment into its pet projects’.
Neil concentrates on the collectivisation of the Local Government Pension Scheme, but HM Treasury lays equal stress on the collectivisation of defined contribution pension schemes. This is the most common type of employee pension scheme, and HM Treasury claims that they ‘are set to manage £800 billion worth of assets by the end of the decade’.
HM Treasury has set its sights on the 60 or so ‘multi-employer schemes, each investing savers’ money into one or more funds’. HM Treasury says the government ‘will consult on setting a minimum size requirement for these funds to ensure they deliver on their investment potential’.
In English that means that funds of a size below the one dictated by Reeves (and naturally Reeves will set the bar at a high level so that the largest amount can be syphoned off) will be collectivised into megafunds, which will be state-directed, as will the holdings of the Local Government Pension Scheme with its projected assets of £500 billion.
Reeves should thus have at least £1.0 trillion at her disposal to allocate to pie-in-the-sky start-ups and Ed Miliband’s Net Zero schemes.
The financing model for Ed Miliband’s Net Zero schemes is a replica of the disaster inflicted on the UK – and continuing daily to be inflicted – by New Labour between 1997 and 2010, called Private Finance Initiative, or PFI. £50 billion of capital expenditure for schools, hospitals, university buildings, Ministry of Defence facilities, traffic lights and so on will have cost the country £278 billion by the time we have worked it off in 2053. That was a major legacy of the last time Labour were in power.
The PFI model is a standard ‘structured finance’ arrangement whereby a small amount of equity is used to ‘crowd in’ a larger amount of subordinated debt, and the aggregate of the equity and subordinated debt is used to ‘crowd in’ the main amount of financing, which is the senior debt. It is the senior debt that pension funds would inject, and the subordinated debt would come from Great British Energy, the National Wealth Fund, hedge funds, vulture funds – anyone willing to give Ed Miliband the time of day on the assurance that they will be permitted to rip off UK businesses and individuals.
The financing is ‘highly leveraged’, meaning there is hardly any equity, and the debt is expensive: the interest rate on the subordinated debt will be around 7% above the rate on UK gilts (or 12% per annum now), and the interest rate on the senior debt will be around 3% above UK gilts (or 8% per annum now).
With current rates on UK gilts near to 5% and assuming a £100 million financing composed of 25% subordinated debt and 75% senior debt over 20 years, the interest alone in the first year will be in the order of £9 million, and then you have the capital repayments, which would be £5 million per annum on a straight-line basis. On that calculation the debt service burden is £14 million per annum for every £100 million borrowed, or 14%.
Reeves will have £1 trillion at her disposal so in the worst-case scenario the debt service burden would be £140 billion per annum, which is money that has to be produced by the Net Zero schemes in order for the pension funds, hedge funds, vulture funds and UK quangos to get their returns.
To enable these rich pickings the consumer – a UK business or private individual – must firstly be deprived of their freedom of choice over where they buy their electricity. One way or another they must be compelled to buy the electricity generated by these schemes, and at the price that makes the schemes viable, just as Local Education Authorities are compelled to use their PFI-funded schools and NHS Trusts are compelled to use their PFI-funded hospitals.
Secondly the price of the electricity must be set at a high level in order to meet the debt service payments as well as all the other costs of the scheme. So much for Ed Miliband’s empty boast that Net Zero will cut energy bills by £300 per annum. What is in store on the cost side can be guessed from the ongoing costs of PFI – more on that below.
There are two possible financial outcomes to this collectivisation:
- The schemes do generate the desired quantity of electricity and consumers are compelled to buy it. Then the ‘investors’ get their contracted returns because UK businesses and individuals can be despoiled of £140 billion per annum, diminishing their wealth, and destroying their businesses;
- The schemes do not generate the desired quantity of electricity, the schemes fail and the pension funds lose their money – alongside the UK taxpayer through Great British Energy and the National Wealth Fund.
Both outcomes are a disaster: under the second one pension fund members will lose their retirement savings and everyone will have to pay in even more tax to bail out Great British Energy and the National Wealth Fund.
The first outcome is more likely because Ed Miliband and Reeves are determined to make this happen, and because they have the power to bind UK consumers hand-and-foot contractually, as their New Labour predecessors in office did under PFI.
Pension fund members might think that they will then cash in, by helping rip off all UK consumers of electricity (including themselves).
But that outcome saddles the UK with huge energy bills for at least 40 years, making us internationally uncompetitive, laying waste the economy and ensuring a high cost-of-living for everyone – a disaster scenario for the order and prosperity of the nation.
£140 billion per annum over 40 years would total £5.6 trillion.
This is so much more serious than PFI because the amounts are so much bigger: New Labour saddled the UK with a total cost of £278 billion for building £50 billion’s worth of assets, a ratio of £5.56 of cost for every £1 of building cost. Reeves and Miliband intend to acquire £1 trillion’s worth of assets. At the same ratio of 5.56-to-1, if PFI is replicated, you come to £5.56 trillion, basically the same £5.6 trillion as calculated bottom-up.
Now we need YOUR help, in finding out what New Labour’s PFI is still costing you in your area, so as to show what a running sore New Labour’s financial schemes still are on every person and business in this country.
That will help us all see more clearly what is in store under Reeves’ and Miliband’s schemes. Please email me at Robert.lyddon@cantab.net so I can put you in the picture about how to find about the ongoing cost of PFI where you live.
Thank you very much in advance – it is a vital national cause.
Bob Lyddon is an Independent financial analyst and a specialist consultant in international banking. Follow Bob Lyddon on Twitter here or find out more about Lyddon Consulting here.
