A New Plan for Savings?
UHEECOI\ yAir E
By NICHOLAS DAVENPORT
T ONG ago in the 'thirties I used to be en-
couraged by Keynes to attack the financial establishment in the City for its sheer economic inefficiency. The reason was that a lot of money was then being put into the capital market which did not find its way into useful productive in- vestment or further the growth of the economy. At the end of the 'twenties there had been a scan- dalous company-promotion boom and many of the issues on the capital market had been made primarily to put money into the pockets of dis- honest promoters or unscrupulous vendors. To- day a scandalous promotion would be impossible : the crooked issue would never get past the Stock Exchange Council, which has so adroitly tight- ened up its rules of disclosure. But there is still a fundamental economic weakness or fault in the financial machine. There is no guarantee that the increasingly large amounts saved by indi- viduals for life assurance and pensions will be used to finance capital investment or directed into the right sort of investment to promote economic growth. The fault lies more perhaps with the Government than with the managers of the private insurance and pension schemes, who can fairly claim that they are making the best of a bad job.
To begin with, the Treasury still makes no attempt to formulate an annual capital budget for its enormous investment programme and arrange for its finance strictly out of the national savings whether voluntary or forced by taxation. It may assure itself that there are sufficient forced savings to cover the capital requirements of the nationalised industries, but it has given up trying to provide non-inflationary finance for the hous- ing programmes of the local authorities (whose borrowings are in a worsening mess) or to see that the moneys collected for the national pen- sion scheme through the NHI contributions are invested in such a way as to create valuable income-producing assets. It is obvious that a great deal of money collected by the Treasury for capital purposes is being spent for current government expenditures. Take the painful ex- perience of the National Debt Commissioners who in 1947 invested the surpluses of the national insurance scheme in the new issue of Treasury 2+ per cent issued by Dalton. They took up 391 per cent of the issue—about £200 million—and saw the market price go down from par to 34 (now 40). Not only did their invest- ment not create a valuable asset—it was in effect used up for current spending—but its market value depreciated by nearly two-thirds (£130 million) and the spending power of its income by about 20 per cent When the Labour party was in opposition, the experts who compiled its revolutionary hand- book on National Superannuation wanted to invest the surpluses in the equities of wealth- creating industries which would increase in market value as the years rolled on, not de- crease as did the bonds of Dr Dalton. 'National Superannuation,' they remarked, 'could provide a system of national savings which would help the country to carry through the large-scale capital investment One of the disadvantages of occupational pension funds is that such a
high proportion of the assets is deposited in government securities, which may be used in- directly to finance current government expendi- ture.'
We may assume that when the Labour govern- ment has recovered from its financial crisis it will begin to look again at the problem of using the savings of persons applied to life assurance
and pensions to finance more directly a part of the national investment. According to the official blue books, the total of personal savings in 1965 came to £2,051 million, being 8.3 per cent of total disposable personal incomes and 21 per cent of the total national savings. Just over half these savings—in fact, about £1,200 million—went into life assurance and pension contracts. Since the improvement in state pen- sions—graduated pensions were introduced in 1961 and there was an upward revision in 1963 —private pension schemes have gone rapidly ahead, many employers contracting out of the state scheme. In 1965, pensions accounted for over £300 million of the total of £1,200 million.
These accumulated funds were invested as to 18 per cent in mortgages, 201 per cent in British government and other gilt-edged securi- ties, 21+ per cent in debenture and loan stocks, 22 per cent in equity shares and 18 per cent in real property and ground rents. The British Insurance Association rightly claims that this wide spread of investments gives the policy- holders 'unparalleled security' and that, being free to invest their funds as they see fit, the managers are able to modify their investment policies quickly and 'anticipate major shifts in the in- vestment climate.' But this is not, of course, what the Government would necessarily want to see.
Dr Dalton complained bitterly of the 'bear' selling of government stocks by the life assur- ance companies, which defeated his attempt to hold a 21 per cent long-term rate of interest Today a reverse game is being played in the gilt-edged market. The Treasury is trying to maintain a high long-term rate of interest while the incomes policy of severe restraint is being practised, but the insurance managers are forcing the rate down by persistent buying of medium- to long-dated stocks, especially when the stocks are selling in a 'capital tax free' zone. (It is remarkable that the 'tax free zone' stocks are commanding a rate of interest or yield up to 1 per cent lower than the rate obtainable in the normal market.) In the last six months the managers have brought the long-term rate of interest down from 71 per cent to 6.45 per cent, which is the yield currently offered on 2+ per cent `Daltons.'
It would be a simple matter for the Treasury to divert part of the new money annually accruing to the private life and pension funds —now approaching £1,200 million—to the finance of local authority housing. It could set up a housing finance agency which could relieve the budget accounts of, say, £250 million a year now appearing 'below the line' under the head- ing of local authority borrowing. I am sure that sooner or later this will be done as part of a grand Labour plan to channel the national sav- ings more directly into the national investment
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