In the City
Markets and pension funds
Nicholas Davenport
The City is feeling pretty sick at the moment. There was a sharp drop in the gilt-edged market last week and on Monday this week. The usual rumour went around that foreigners were unloading the stock they bought so heavily at the end of last year, taking their profit while sterling remained firm. The week's call of £320 million on Treasury 101 per cent did not help. It is another reminder that the Bank of England has been overdoing its 'tap' issues in the gilt-edged market, to which I have so often called attention. This is the penalty for having a monetarist Governor.
As for equity shares they have been sliding down to the lowest levels seen for many months. The FT index at 458 is now about 100 points below its top. The chartists who interpret the movements on the price graphs are still pessimistic. The bull market is not merely in suspense; it is in a bear phase which will soon, they say, be reaching a dramatic culmination.
The City is certainly cocking a snook at the prime minister who has been making extraordinary optimistic appraisals of the state of the British economy. The fumes of North Sea oil seem to be acting as an hallucinant for ministers who talk glibly of our industrial strategy. Does any exist?
The slump in gilt-edged is unjustified but there is good reason for the fall in the equity markets. The directo rs of the private sector life and pension funds have become bearish in the economy. When they meet on their boards they are usually moved by the state of their political emotions. I ought to know because I sat on one of their boards for over thirty years. They usually lunch before meeting and the imbibing of port and brandy aggravates their fears of a social revolution. As the press is hotting up its political comment for the coming election the frightened figures of the Establishment have become fearful of the future. They know that if Labour wins, the wise and moderate Callaghan will be voted out of the leadership, the extreme left will take over and the high places of the Establishment will be nationalised. This does not make for a bullish equity investment policy. The fund managers always stop buying equity shares when their directors are politically worried and now frightened by the possible breakdown in the pay guide-lines.
The figures published last week in the Government's Financial Statistics suggests that the life and pension boards actually began to slow down their purchases of equity shares in the third quarter of 1977, when they bought £528 million worth against £628 million in the second quarter. But they pushed up their buying of property from £152 million to £347 million, which could be a sign that they were already beginning to feel less sure of the equity market. There is also a technical reason why they are absent from the equity market at the moment; it is that they are absorbing some heavy new issues — the latest being that of the Midland Bank for £97 million. It is feared that the Royal Insurance may soon be following the example of the Commercial Union which recently asked for £73
million. •
The impression one gets from the spate of new issues and the rising flood tide of the life and pension funds is the disorderliness of the financial scene. There is no attempt to relate or to co-ordinate the supply of and demand for funds. There are no investment rules. When I first came into the City and sat on an investment board in the life business I was amazed to find that it was left entirely to the whim of the directors to make the investment decisions. They might one day put the whole of their new money in Japan and on another day buy a mine in South Africa or a pastoral company in Australia. They were advised by merchant bankers, who had no responsibility to the public, or by stockbrokers who at that time had had no economic training. I certainly did not want to see investment dictation by the government which would be fatal, but at least I thought the economists at the Treasury might give the fund managers some 'guidelines'.
Reading in the Sunday press the nature of some of the decisions recently taken by the managers of the public sector pension funds I suggest that in this area official 'guide-lines' would not be out of place. The most extraordinary is the decision of the railways pension fund to invest some £20 million in works of art. This not only takes on peculiar investment risks but goes against the old rules that a pension fund must produce a rising income. The railways were more orthodox when they made a bid
of £80 million for a Scottish investment trust but this suggested that they were
running out of investment ideas. The Coal Board pension fund managers paid £100 million for another investment trust but they showed that they had more sensible ideas when they bought shop frontage on the north side of Oxford Street where the middle and working classes congregate to do their shopping. To quote the Business Observer the Post Office pension fund has bought a shopping centre in Bishops Stortford, a group of Safeway supermarkets, farmland in Lincolnshire, Sussex, Cambridgeshire and Essex, an office block in downtown Houston and a shopping centre in Wichita Falls, Texas.
What distinguishes the directors of the public sector pension funds from their opposite numbers in the private sector is that they are not frightened by the prospect of wage explosions, social unrest or social revolution. They are paid by the state; they hold jobs which are not subject to private dismissals; they are cheerful and confident. I am not suggesting that they are not fine men with a public conscience. To quote Mr Harry Lucas, head of the General and Municipal Workers Union pension fund: 'The workers, whose deferred pay the funds are, seek to establish joint control of these funds not for ideological reasons but -in the interest of the long-term future of the economy on which all our members depend'. The trouble is that the long-term future of the economy may demand the loss of some of the jobs on which their members depend.
All this disorderliness in the financial scene will disappear when the Government gets down to organising a public unit trust which will be managed by professional investment technocrats divided into three boards for bonds; equities and property. The workers' pension funds could then swop assets for units in the PUT. Sooner or later something will have to be done. As Mr. Ken Thomas, general secretary of the Civil and Public Services Association remarked: 'One can reach a stage where pension funding is not just a valuable part of the economy, it is the economy.'
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