Over the past two weeks, the big energy companies have reported huge quarterly profits figures. BP announced $2.6bn, following on from Shell’s $5bn. Centrica’s retail arm, British Gas, reported an almost 900 per cent increase in its earnings on the same period last year. As soaring energy bills have become recognised as one of the key contributors to overall inflation, these kinds of price and revenue fluctuation are, in effect, cash distributions from households to corporations. In response to these distortions, as well as to pressure from the opposition, in May last year the government imposed a 35 per cent energy-profits levy that will remain in place until March 2028. But as the cost-of-living crisis continues to affect ordinary households, the Labour Party has criticised the current measures as inadequate, and called for loopholes and exemptions in the current levy to be closed.
But there is opposition to more stringent windfall taxes, or indeed any other measures to rein in large-scale excess profits, particularly on the political right: dividends eventually flow back to households via our workplace pensions – or so the story goes. In Italy this week, a windfall tax imposed on banks has been hastily diluted and capped after markets reacted poorly and share prices dropped. Other countries have imposed similar taxes as central banks increase their interest rates on lending. The UK has imposed windfall taxes before, including under New Labour, the coalition government and under the Conservative chancellor Geoffrey Howe, who implemented a banking profits tax during the 1981 recession.
Last year, the then education secretary Nadhim Zahawi was reported to have vocally opposed windfall taxes in cabinet, claiming that they would hinder investment and be a problem for British pensioners. Columnists at the Spectator made similar remarks, linking pension-fund returns to the health of FTSE 100 balance sheets.
These kinds of arguments don’t stand up to scrutiny. First, it is important to note where pension investments are actually going. British pensions own very little of UK plc, and currently have just 13 per cent of their portfolios invested in UK equities.
[See also: The age of greedflation]
This follows a long-term downward trend, despite repeated attempts by both political parties to try and encourage funds to focus on more domestic, productive investment. Funds have, for decades, been a core element of the broad push-back against the potential of “political investment” – that is, pension funds making investment decisions according to collectively decided principles, rather than purely optimising returns.
Today, the UK’s funded pension schemes have assets worth around £2.2trn, and the debate over where these investment resources should go continues to rage. In May, the shadow chancellor Rachel Reeves declared that Labour would be willing to force pension funds to invest in home-grown industries in an attempt to counteract the decline in domestic, productive investment. But pension funds’ investment choices are shaped by the financial markets in which they find themselves and their specific regulation. This has pushed many of them to buy large quantities of UK government debt, or bonds, together with using riskier leverage and derivative strategies. This combination is inherently destabilising, as seen in the wake of the Liz Truss mini-Budget debacle last year.
Second, not all British households have the same access to pension wealth, as its distribution is extremely unequal. Nearly half of pension assets are owned by just the top 20 per cent, and pension wealth is distributed almost twice as unequally as incomes. While the policy of auto-enrolment into workplace pensions has extended coverage, the fact remains that workplace, earnings-related pensions exacerbate broader economic inequality – those on lower wages and/or with greater informal care responsibilities get poorer outcomes. Those working multiple minimum-wage jobs, or who find themselves in the gig economy, often remain locked out completely. Furthermore, within workplace pensions, the move towards individualised schemes (ie, the so-called defined contributions) has put individuals at much higher risk, as contributions are low and comfort in retirement has become dependent on the vagaries of financial markets.
[See also: The Grey Recession]
Those with little pension wealth are extremely vulnerable in the UK system. They are forced to depend on the state pension for quality of life. Unfortunately, the UK state pension is woefully inadequate, achieving one of the lowest replacement rates in the OECD. As a consequence, the Department for Work and Pensions projects that over half of current workers will fail to achieve a moderate retirement living standard. Paradoxically, money “saved” by keeping the state pension below adequacy is spent on poverty-avoiding benefits and exorbitant tax rebates to pension contributions into workplace schemes, which are deeply regressive by design.
Solving systemic problems requires bold solutions. There is a need to move away from the current individualised system, which is overly reliant on financial market performance. Instead, the state pension system should be greatly expanded. This could be partially funded by removing the pension tax reliefs that disproportionately benefit the richest. Workplace pensions should enhance collective risk-sharing and progressive contribution mechanisms. This could reduce inequalities and provide greater security in retirement income. Collective pensions could also improve the capacity to finance productive investment, and to potentially open the space for more participatory decision-making in asset allocation. At the same time it is important to recognise that pension funds are not always best-placed to be the primary providers of finance for highly uncertain and risky projects.
The UK pensions system needs a radical reimagining. It is currently too unequal, too financialised and too detached from investment in the real economy. The critics of windfall taxes try to equate the interests of the ordinary pensioner with the interests of UK corporate boards – but our collective ownership of UK assets through our pension funds has long been diminished. A bolder vision is needed, and pensioners can’t be used as an excuse for allowing such blatant acts of corporate extraction.
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