Ros Altmann: Stop subsidising overseas growth with taxpayer money

The former pensions minister told FT Adviser that too much money is being invested outside of the UK, incentivising growth elsewhere when it is badly needed at home.

Pensions and income tax relief amount to approximately £70bn a year, which is money given to savers virtually for free and could be used to bolster UK equities and infrastructure.

"I can't understand why the government thinks taxpayers want to spend £70bn a year to invest in overseas growth," she says. "[We need] a recognition that our domestic pension assets, institutional assets, and long-term savings must be incentivised to favour the UK."

According to the independent consultant, who is also a member of the House of Lords, this can be done in a number of ways, including:

• Introducing incentives that boost the tax reliefs and bonuses from tax payers to support UK markets.
• Offering incentives only for new pension assets, or income from existing assets, that have a set share of UK assets.
• Mandating pension funds to hold a proportion of their assets in UK listed companies, for instance 25 per cent, which corresponds with tax relief given to savers at point of withdrawal.

"That would revive the UK markets, it would boost UK growth, it would bring in more overseas investment...our companies would stop being taken over hopefully by all these foreign groups and our markets would revive in the post-Brexit world," says Altmann.

The government has already announced it wants to change the way pension money is being used.

The so-called Mansion House reforms include an agreement between major workplace pension schemes to increase investments in private equity and explore handing defined benefit scheme sponsors greater flexibility to access surpluses.

The reforms did not feature in the King's Speech earlier this month but Altmann is not concerned about that.

"There's a lot you can do with regulation and they've still left themselves room for a pensions bill anyway," she says.

She adds: "My hope is that we will at some point get the government to understand that there is a tremendous opportunity in the UK to use pension assets to boost UK markets and companies like they used to when I started managing pension fund money."

A life of pensions

Altmann has spent all her adult life working on pensions. After her first degree in economics she went to Harvard for a year and then returned to LSE for a PHD on pensions.

"I have done every aspect of pensions during my career and it's always been about either later-life income, or helping pensioners, or policy, or I guess the bulk of the years has been about investing long term to provide retirement income," she says.

When she first started out in the 1970s "nobody looked at pensions", but this also presented a niche for the aspiring academic, who was particularly interested in the mechanics of labour economics.

He said, 'Could you come in to Downing Street tomorrow? I need to ask you something urgently. David Cameron and I want to speak to you'.

The late economist professor Tony Atkinson, who is credited with virtually single-handedly establishing the modern British field of inequality and poverty studies, offered Altmann an untouched database containing information on how pensioner incomes are comprised and poverty among the elderly.

This ended up forming the basis of her PHD study.

"It was just fantastic," says Altmann. "I was working at LSE on a new database that had only just been released of the family expenditure survey, so looking at the income and spending patterns focused on pensions.

"And my advisers were professor Tony Atkinson, who was the particular person who got me into it, Mervin King, and Nick Stern. I was just there and working with them every day, it was wonderful."

After her studies she had an academic job lined up, but thought to herself if she wanted to be a good economist she needed to experience the real world first.

She landed a job managing pension fund money for the Prudential. It was the beginning of the 1980s and "here I was, a brand new starter suddenly in charge of billions of pounds of money that they wanted to switch from bonds into equities," she reflects.

At the time the idea was that over the long term equities should outperform bonds, she explains, so funds were switched into equities and diversified overseas.

"It was a really exciting time to be in the City and of course I was managing to deliver great returns for our pension investors."

She started off as a UK funds analyst, then she headed up Chase's European equities investment division, an area she describes as "very much a backwater" riddled with inefficiencies, and eventually its international equities, including US pension funds.

In the following years she took a couple of more jobs in the City until she decided it was time to quit City life after having her third child.

Entering policy... and politics

It did not take long for Altmann to re-emerge on the scene, this time with her own consultancy business, which eventually led to a role in the UK government.

"One of my first assignments was looking at investing for venture capital and why weren't pension funds looking at any of this," she explains. "I ended up setting up a big review for the Treasury...which was basically doing what the Mansion House reforms are now doing.

"I've seen it all come round, looking at how to get pensions funds putting more money into venture capital and private equity."

By the early naughties the bulk of her work was for the government of the day, who were increasingly interested in asset allocation and social policy, and how better-off pensioners were getting access to great opportunities while many other people were not benefitting from it.

Number 10 was also looking at savings policy for lower income groups at the time, and how to encourage people to save more for the long term.

Then the tech bubble began to burst in 1999 and there was a lot of angst at the time about how to help people have a richer retirement and greater savings, says Altmann.

For instance, she was involved in launching child trust funds in 2002, which were designed to provide youngsters with a nest egg when they start their adult life and encourage them to develop a better savings habit.

"That was all about marrying the idea of long-term investment returns helping people avoid poverty, or improving their incomes," she says.

Central banks have sacrificed a lot of independence in the name of QE and it is going to come back to bite them, and it's already starting.

Meanwhile, she took the government to court over flawed laws that meant members of underfunded pension schemes at insolvent employers were at risk of losing their pension funds.

The “pensions theft” scandal saw tens of thousands of members of final salary schemes lose all or part of their promised pensions when their employers collapsed between January 1997 and April 2005.

The case started off discussions that led to the establishment of the Financial Assistance Scheme and Pension Protection Fund, the former of which Altmann was critical.

She describes the case as a "shock to the system" that showed "you couldn't just rely on the actuarial assumptions and that you needed a safety net for the worst outcomes".

In 2010 Altmann became director general of over-50s specialists Saga and chaired several investment-related boards, before being invited back to Whitehall as the government's business champion for older workers.

"That work led to me doing more and more with the coalition government and then suddenly in 2015 I get a phone call from George Osborne," she says.

"He said, 'Could you come in to Downing Street tomorrow I need to ask you something urgently. David Cameron and I want to speak to you'."

She was offered the role of pensions minister should the Conservatives win the next election – something that seemed unlikely at the time. She declined, saying Steve Webb would be the man for the job. Besides, she did not think the Conservatives would win again, at least not outright.

When they did however win, she was made pensions minster, "unfortunately!", she exclaims. The self-professed politics novice, who did not want to work in the Department for Work and Pensions to begin with, relented because she was a fan of Osborne's pension freedom reforms.

But she suffered ongoing clashes with several colleagues and her boss over her pro-EU stance, which eventually led to her walking out.

"I felt as an economist that coming out of the EU was a terrible idea for all our futures," she says. "So I was very strongly campaigning for remain. That was at odds with my secretary of state in the DWP and most of the other ministers.

"It was terrible. It was horrendous," she says, "I am a policy person, not politics."

Naturally, in her current status as a peer in the House of Lords she is most passionate about cross-party work, saying "all the stuff I've done and made any tiny difference on here has been when it's been working across the house with all different parties."

Interest rates must come down

Altmann is a long-standing critic of quantitative easing, saying it has gone on for too long and caused damage on several fronts.

"I believe that the central banks have sacrificed a lot of independence in the name of QE and that it is going to come back to bite them, and it's already starting."

The Bank of England's QE programme commenced in March 2009, shortly after the global financial crash, and it was not until February 2022 that it started to reverse this policy by beginning to sell the bonds it had purchased under QE.

"QE should never have lasted this long. The economy was growing, you had a period in the sort of early 2010s when inflation was actually quite high and the central banks kept on. I put that down to the thinking that QE was such a benefit for the wealthiest, most powerful groups."

According to Altmann, QE helped the government with its funding needs on the one hand and the asset-rich, as it inflated prices, on the other. This left little room for any sincere criticism of the policy.

"Yes, they dress it up as buying gilts to lower long-term interest rates. 

"What that means in plain reality is that you are artificially inflating the price of government bonds, which determine in all the capital asset pricing models the base asset against which all other assets are priced.

"Therefore, if there's a huge buyer of government bonds, those who are selling government bonds suddenly have money to invest that they wouldn't otherwise have had, and that goes into other assets.

"It's ironic that this was against the backdrop of what was described as austerity."

She warns there is a serious risk that central banks have not realised how tight monetary policy now is because of quantitative tightening. "I genuinely think it's gone too far," she says.

When it comes to monetary policy she points to a possible lag effect of 18 months, not least because a significant number of mortgage borrowers are still on fixed rates.

The Financial Conduct Authority's latest data on mortgage switching found 74 per cent of mortgages were on fixed rate deals in late 2021, typically fixed for between 2 and 5 years.

Altmann says: "As we go into next year my view would be that central banks are going to have to bring rates down. I'm not talking about to 0, but I think they've gone too far too fast, they have not allowed the usual time to sort of see how this is going to actually pan out.

"There could be an assumption that in the end, if there's some kind of meltdown, they'll just do more QE really because that's been the go-to for a long time."

She adds: "What nobody has focused on properly yet is the impact on defined contribution schemes."

The real catastrophe

Some older investors have lost vast amounts of their money from recent market falls, linked, according to Altmann, to both QE and former chancellor Kwasi Kwarteng's politics.

These falls were caused by a bond market crash – assets savers were told were safe. "That's the real catastrophe," says Altmann.

FT Adviser has spoken to clients of the Aegon Lifestyle fund, who are automatically placed into the Scottish Equitable Retirement Plan one year from their retirement, who have lost as much as 41 per cent over the past three years and 30 per cent over the past five years.

The fund is intended for those who will be buying an annuity within the next 12 months when they enter retirement.

It has a 75 per cent allocation to gilts and 25 per cent to cash, and suffered as gilt yields have risen sharply over the past three years as a consequence of both last year's "mini"-Budget and latterly the BoE's interest rate rises. 

"The impact of the ['mini']-Budget was partly the result of QT, and you needed a bit of QE to stabilise things," says Altmann. "Part of it is now being driven by what I believe is over-tight monetary policy, particularly short rates.

"I think we really urgently need central banks to recognise that this is not the best way to react to the post-QE scenarios."

Carmen Reichman is multi-media editor at FT Adviser