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Mistake: Jeremy Hunt should reverse Gordon Brown’s 1997 tax take on dividends paid to pension funds
There’s just the chance that Jeremy Hunt will start righting a big mistake on Wednesday. It is about the disastrous way in which pension funds invest our savings.
Each year, the London Business School and Credit Suisse (now absorbed by UBS) produce the Global Investment Returns Yearbook. This analyzes the prices of stocks, bonds and cash in 90 markets around the world, going back to 1900 in 23 of them.
The latest report came out last week. Their message is that if you invest in stocks in any major market, reinvesting the dividends, your long-term savings will outpace inflation by a wide margin.
The best market is the United States, with a real annual return over 125 years of 6.5 percent, just ahead of Australia. The UK had a real return of 4.8 per cent, while in Germany and France it would have been just over 3 per cent.
But if you put your money in government bonds, your real return would have been between 1 and 2 percent in most markets, including the United States and the United Kingdom. And you would have lost money if you had invested in bonds from Japan, Germany, Italy or France.
Are stocks more volatile? Most people assume so, and that is the argument for pension funds to prefer bonds. But the study shows that bond crashes have been almost as bad as stock crashes. In the United States, the worst crisis occurred between 1929 and 1933, when stocks lost almost 80 percent of their real value. But the second worst level came for bonds in the early 1980s, when they fell almost 70 percent. The recent declines since 2021 have been more severe in bonds than stocks.
However, what surprised me most about the report was the extent to which the US market has dominated global investment. In 1900, the value of the UK market was slightly higher, but by 1913 the United States had surpassed it. For most of the period from then until the late 1980s, when Japan briefly surpassed the United States in value, U.S. stocks accounted for more than half the market. They now account for 60.5 percent of global value, eclipsing Japan at 6 percent, the United Kingdom at 4 percent, and China and France both at 3 percent.
But isn’t there a danger that US markets are overly dominated by the Magnificent Seven, Microsoft, Apple, Amazon, etc.?
Well, no. In reality, the United States is one of the least concentrated markets, with the country’s top ten stocks representing only 25 percent of the total. Here our top ten represent 36 percent. In both France and Germany they are more than half. There is safety in breadth, in the sense that a high-tech collapse would cause less damage, as long as the value of the other companies was maintained.
There are other surprises, including the argument for buying corporate bonds. There is a boom in topics like this right now. The LBS team found that their higher returns more than offset the higher risk.
And looking forward? A wealth warning must be hung over any projection of future investment returns. But, for what it’s worth, the authors calculate that people starting to save for a pension now, Generation Z, should expect a real annual return of 4.5 percent on global stocks, compared with 2 percent. cent on the bonds.
All of this makes the divestment of our pension funds from UK shares scandalous. They, along with other institutional investors, have gone from owning half the market in the 1990s to less than 4 percent.
It’s a point my colleagues and I raise often and it’s an issue that’s gaining ground in the city. There is a further twist, with the bias not only against stocks in general, but also against UK stocks in particular.
Simon French, chief economist at Panmure Gordon, points out that in all other countries the pensions industry overweights its holdings in its domestic companies. In the UK he underweights them by 41 percent. That’s crazy.
So, Mr. Hunt, here’s your chance. Reverse that tax appropriation made by Gordon Brown in 1997 on dividends paid to pension funds and implement radical changes in the regulations that pushed them into this absurd situation.
Everyone saving for their old age, especially Generation Z, will be deeply grateful.