What do governments in fiscal crisis do? They indulge in all sorts of financial repression.
In the UK so far this has been limited things such as to keeping real interest rates well below inflation, forcing pension funds to hold far too many government bonds for the good of their clients, and the like.
But the odds are this is only the beginning of the effort to get us to hand control and/or ownership of our cash to the state.
Those wondering where we may end up might look to Poland. There, ‘pension reform’ is being discussed. The most likely outcome, according to Lombard St Research, is the “full transfer of the private arm of the pension funds to the state.”
The pension system in Poland has three tiers to it – a voluntary bit, a state managed bit, and a mandatory private bit. The last is the one of interest at the moment. Thanks to the fact that workers are obliged to contribute to it, it has huge assets under management – 280bn zlotys, the equivalent of over 17% of Polish GDP.
Nationalising this could push Polish national debt down to 37% of GDP (as the government bonds held in the pension funds would simply be cancelled). That would be nice, given that it is currently on the verge of heading over 55%, a level that under Polish law “means the government would have to step up its spending cuts and balance the budget for next year”.
Clearly, this is all only a short-term fix, given that if it nicks the assets now, the state also takes on the future liabilities of the private pension funds. But right now governments aren’t thinking much about the long term – they are thinking about how to transform as many private assets into state assets as possible as fast as possible. And this is a very effective way to do just that.
Note that Poland is hardly the first to think of it. Hungary did it a few years back – telling its furious citizens that they could either hand their pension funds over to the state or lose them altogether.
And earlier this year Kazakhstan did the same, something the analysts at Strafor say was particularly disappointing given that it had been “a standout success when it came to putting into place sensible and successful financial reforms.”
I can’t yet see the UK government getting away with anything quite this explicit, but the constant shifting of the regulatory environment around our own pensions system makes it clear that they really wish they could.
See this week’s magazine – out on Friday – for more on this. If you’re not already a subscriber, subscribe to MoneyWeek magazine.