Alf Young: George Osborne looking to pension funds

The Chancellor is studying ways managers can invest more of their assets in the UK infrastructure

THE back-drop to George Osborne’s autumn spending review on Tuesday could hardly be bleaker. The Bank of England has chopped its growth forecasts to around 1 per cent for this year and next. New detail on UK growth in the most recent July/September quarter confirms the rise of 0.5 per cent, but reveals it was all down to increased stock-building by companies and strong government spending. Of the coalition’s promised export-led recovery there is no evidence whatsoever.

The eurozone crisis rumbles on, fractious and unresolved. Even the lynch-pin, Germany, which failed to find buyers for 40 per cent of its latest ten-year bond issue, is seeing its own growth prospects dimming rapidly. The Bundesbank has slashed its GDP forecast for 2012 from the 1.8 per cent it was anticipating in June to as little as 0.5 per cent now. American growth expectations are also being squeezed. And in Washington, the super-committee charged with coming to a cross-party accord on dealing with the US federal debt mountain has broken up in unresolved disarray.

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What we call the global economic crisis – what the rest of the world calls the North Atlantic crisis – shows no signs of abating any time soon. There is growing talk of disorderly default in the eurozone. Some are openly speculating about full or partial break-up of the single currency itself. One UK think-tank now thinks a full decade of austerity beckons here. With an unexpected talent for understatement, David Cameron tells us reducing government debt is “proving harder than anyone envisaged”.

On Tuesday the independent Office for Budget Responsibility is almost certain to confirm what we already know – that growth prospects are much diminished and that the coalition now has next-to-no-chance of delivering on its core ambition, to eliminate the UK’s budget deficit in this parliament. The longer the search for rebalanced economies and fresh well-springs of sustained growth proves fruitless, the more likely it is that governments around the North Atlantic, whatever their credit ratings, will collectively wallow in the mire of stagnant demand and hard-to-remove indebtedness.

So does anyone currently in power in this part of the world have a fiscal equivalent of Flash or Shout, a debt-removing, growth-enhancing spray-on remedy? The Chancellor may well treat us to another of his plans for growth, just as he did at Budget-time in March. That plan offered 137 initiatives, ranging from the significant to the trivial. The Financial Times has just done a review of how they have been implemented and has given Mr Osborne a modest B minus for delivery.

Of the big tickets items, the £1 billion promised for an experimental carbon capture and storage project is still sitting in the Whitehall coffers after the collapse of the proposed pilot at Longannet in Fife. The £2.5bn business growth fund has so far made just two loans to the value of £8 million. An enterprise finance guarantee scheme, designed to help small and medium-sized businesses export more has signed up only four companies in the past eight months.

If advance signals prove accurate, Mr Osborne’s latest growth plan may manage to tickle even Alex Salmond’s fancy. Scotland’s First Minister was banging away on Thursday about the need for the UK government to get going on a big new infrastructure investment programme to stimulate much-needed growth. Mr Salmond even put a figure on it – £20bn, of which some £2bn would presumably find its way to Holyrood. The UK Chancellor may do better than that. Not out of the Treasury’s existing resources, you understand. These are even more stretched that they were.

However, with a talent for irony to match his leader’s new-found talent for understatement, Mr Osborne is expected to signal, less than 24 hours before as many as two million public sector workers go on strike in defence of their existing pension rights, a new UK infrastructure boom funded, in large measure, by UK pension funds.

Two big public sector pension funds – the Victoria Fund Management Corporation which represents municipal workers in that Australian state and the Ontario Teachers Pension Plan from Canada – currently own a 48 per cent stake in Birmingham Airport. The UK Treasury, already faced with trying to unravel the most egregious excesses of old PFI contracts to build UK schools, prisons and hospitals, has been wondering why more UK pension funds aren’t doing the same and looking at ways of encouraging them, public and private alike, to invest more of their assets in UK infrastructure.

Pension funds, many of them carrying significant deficits against their long-term liabilities, are finding it hard, in the current climate, to generate strong enough returns from their traditional investment classes, equities and government gilts. Until yesterday’s modest recovery, the FTSE had been on a nine-day losing streak, its longest since 1984. Yields on UK gilts are currently lower than their German equivalent.

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Defined benefit pensions schemes in the private sector that have closed to new members and even to future contributions from existing members are increasingly looking for safe investments with reliable inflation-linked returns over a 30-year timeframe or more. Anything from new road and rail infrastructure and social housing to large-scale wind farms could fit that bill.

If a credible means of allowing pension funds to invest in such schemes can be created, the impact could be hugely significant. One calculation suggests that, if all defined benefit pension funds in the UK invested just 5 per cent of their current assets in infrastructure, some £50bn of new investment could be generated across the UK, two-and-a-half times what Alex Salmond’s been demanding.

It’s a great pity the coalition at Westminster is only engaging with such innovative ideas now, when George Osborne’s Plan A – austerity, shrink the state and let the private sector fill the growth gap – looks holed below the waterline. It could take years to work up viable infrastructure investment schemes that pension trustees could credibly endorse on behalf of their members. Meanwhile, there’s been a colossal collapse in confidence all the way from the High Street check-out to the boardroom. Families are becoming increasingly careful with their household budgets. Companies, even big corporations awash with cash, are reluctant to invest because of the overall state we’re now in.

When the Tories and the Lib Dems set out on their mission to cut the deficit in one parliament they should have remembered the paradox of thrift, popularised by John Maynard Keynes. Every actor in an economy can’t pay down their debts at the same time. There lies chaos. If government wants to cut its deficit, someone else has to save less or spend more.

If Osborne and company had been talking about pension funds investing in infrastructure back then things might have been different. Now it just looks like another sticking plaster on a spreading panic.