The Green Party’s policies on pensions seek to tackle inequality in retirement provision. But these policies go against the interests of savers by constraining diversification and would render the fund management industry useless, says Luisa Porritt
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Investment in green and infrastructure assets through pensions
The Green Party wants to make it obligatory for employer-sponsored pension funds to invest in long-term public assets through the Green Investment Bank. These assets include railways, renewable energy, the National Grid, social and affordable housing, projects sponsored by local authorities, and public facilities, such as hospitals.
According to the manifesto:
“These assets offer a safe, long-term and predictable rate of return – ideal for pensions – and the pension fund will provide the savings needed to invest in the assets. Such public assets would replace pension fund assets, many of which consist of shares in energy companies whose main assets are unusable fossil fuel reserves.”
But constraining investment to a specific asset class, regardless of a particular scheme or individual’s circumstances, is a gamble on the performance of these assets.
Worse, assuming that these assets will deliver “safe, long-term and predictable” returns suggests the manifesto writers know something investment experts don’t. While pension funds express interest in infrastructure investments, most of them envisage this making up part of a diversified portfolio.
The only apparent room for diversification is between the different public assets listed.
It is unclear whether this decision will be left to trustees, consultants and investment managers, or whether the Green Investment Bank will choose the assets for schemes to invest in and the respective weightings between allocations.
This begs the question what the fund management industry would be for with such a limited pool of UK assets to invest in. Would existing employer-provided pensions continue to invest as normal or be forced to reallocate their investments? What would all this do for the stability of the economy, given the massive short-term reallocation of funds toward a single asset class? And isn’t it the role of pension scheme managers to decide whether they think energy companies’ stocks will perform better or worse than UK infrastructure assets?
Tax relief for private pensions cut by half
Individuals investing in a private pension who have thus far benefited from tax and National Insurance relief would also see these benefits cut by half under Green Party proposals.
Those on higher incomes would further be hit by the National Insurance upper threshold being scrapped, which the Green Party argues would bring an additional £28bn into the Treasury and could partly be used to fund an increase in Child Benefit payments.
Incentives for investing in a private pension would be dramatically reduced.
Introduction of the ‘Citizen’s Pension’
The Green Party also wants to introduce a new ‘Citizen’s Pension’, effective from 2016. This would be a state-funded pension given to everyone regardless of their history of contribution.
The aim is to eliminate poverty in retirement, by paying out £180 per week to a single pensioner and £310 to a couple, rather than the existing maximum of £115.95 per week. This would raise the state pension obligation from £90bn to £116bn, or by £26bn.
The higher provision would be funded through the proposed reduction of tax and National Insurance incentives for private pensions, which the manifesto claims would raise £20bn. A further £6bn would be taken from the abolition of the National Insurance upper threshold, it says.
The manifesto seeks to create equality among pensions provision, but in the process of doing so alienates anyone who has saved or is saving for a private pension using a diversified portfolio.
In seeking to end poverty in retirement, restricting retirees to a single set of assets which may not perform as expected could see them poorer than they would be under existing arrangements.
Punishing these savers in order to fund a small increase in payments made from the state-funded pension scheme seems unfair on the large number of individuals it would affect.