A Lesson Learnt from Australian Pension Funds
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Welcome to the Meron Talks Money Market Wrap, where we talk about the biggest moves in the markets this weekend and what's driving them. I'm Meron Summerset-Webb, editor at large for Bloomberg UK Wealth. And I'm John Stavik, senior reporter for Bloomberg and author of the Money Distilled newsletter. Almost thought you weren't going to remember what you did there, John. I mean, it's touch and go. It is touch and go. Yeah. I mean, there are instructions in our script sometimes. I'm going to put one in yours saying keep breathing. Yeah.

Right. Now, it's a slight lie, the introduction I've just given, because we're not really going to talk about the biggest moves in the markets. What we're actually going to talk about is UK inflation coming in. Yes.

unexpectedly high brackets again. So 3.5% for the year to the end of April, which is as high as it's been since last January. January 24th. Last January. So higher than expected, not madly higher than expected, but nonetheless, this is not great. We want to see it coming back down towards 2%, which is where, for reasons nobody knows it is supposed to be. And that isn't really happening. Right, John, you wrote about this this morning.

Yeah, everyone knew there was going to be a jump. And to be honest, 3.5% is higher than was expected, but it's well within the realms of possibility. But I think the real problem for the Bank of England now is the base rate is at 4.25%. Now, in normal times, as in before 2008, the base rate is higher than the inflation rate.

And now if you do, they're like a tiny spreadsheet that's really easy to do and just take the average of what inflation normally comes in at each month over the last 30 odd years. If you look at that, then inflation is very likely to stay at an annual rate of between 3.4% and 4% this year for the rest of this year.

So the point is the Bank of England really doesn't have very much breathing space to cut interest rates further without being at risk of CPI inflation going back above the bank rate at some point this year. And already RPI inflation, I know no one likes RPI, but it is still used to index link a lot of gilts and contracts. You do like RPI.

It's still a really important number. I mean, aren't student loans still indexed to RPI as well? Yes. The interest rate on them is RPI plus. Yeah, and RPI is at 4.5 now. And that's the first time it's been above the bank rate since the end of 2023. And before that, again, during the pre-2008 normal era, RPI was always below the bank rate.

So I think this is very uncomfortable politically for the Bank of England as much as anything else. But it's policy incompetence driven inflation, isn't it? I mean, this is water bills, sewer bills, energy bills. It's all that kind of thing. So it was uncomfortable for the Bank of England, but it should be extremely uncomfortable for our political leaders as well. What with them being in charge of all those vital infrastructure areas and their costs. Yeah.

Yes, but there's very little that they'll take any responsibility for. And B, I mean, for all that I don't think the current government is doing a very good job, this is compounded problems from years and years and years of mismanagement.

when I say the government I don't even mean government that means decades worth of government you know I mean I keep reading about reservoirs which I'm rather bothered about at the moment as you know I live in Scotland where we have no source of water but already there's conversations about you know we'll have to have hosepipe bans and restrictions on this and restrictions on that but of course if we just built some reservoirs or had built any reservoirs over the last couple of decades we wouldn't really need to worry about that kind of thing Or maybe an aqueduct between Glasgow and Edinburgh

Because, you know, you're never going to get a shortage of rain in Glasgow. That's absolutely true. But, you know, we can't even build roads. Bring back Roman times, that's what I say. John. Sorry.

We are actually planning to do more economic history on this podcast and we have got a few good economic history pods coming up, but John is jumping the gun slightly there. Nobody listened to John on Roman financial history for the moment. That time will come. Anyway, so the key question then is, does this mean that people who are waiting, hanging on for interest rates to fall significantly over the next year because they think they'll get a cheaper mortgage, lower rate on their loan, etc. Should they stop waiting, give up? What do you think is going to happen now?

I mean, I think they should. I think you have to be very careful. I mean, obviously, your personal finances should never be reliant on an interest rate variable changing to the point where it's going to ruin your life if it doesn't go your way. But more than that, I mean, if you look at what's happening, and this is something I need to look into in more detail, but if you look at what's happened to long dated bonds, then

then the interest rates on long term debt, and this is across the world, it's not just the UK, but the UK is quite vulnerable, is going through the roof, actually, especially since the start of May. I mean, for all that, you know, we kind of had the big panic about Liz Trust. Well, the 30 year guilt is now well above where it was in October 2022.

And the 10 year guilt is also higher than it was back then as well. So it's long term interest rates are not coming down, they're going up the weight.

And those are the ones that will come, not the 30 and the 10 year, but I would not rely on your mortgage rate coming down in the very near future or any time really. That doesn't mean it won't. I mean, maybe it will, but I certainly wouldn't bet on it. Okay, so John, you don't approve of hope-based personal finance? I feel that hope is not a strategy, as I'm sure someone once said.

Fair enough. All right, listen, the other thing that's been bothering both of us this week, and you've also written about, and it sounds niche, but it totally isn't, is this business of Australian pensions and the idea that they are going to begin to tax inside pension wrappers, unrealized gains above a certain asset base.

And that's, it's A, it's complicated, difficult, confusing. The numbers are a nightmare. What do you do if you tax again? That's never been realized and it turns into a loss. All these things are very complicated. It's a very strange policy. And it's a worry because we have Angela Rayner out there

sending memos around the place asking how to raise more taxes on what she considers to be the well-off in the UK. And I'm sure that she looks all around the world to pull up ideas. And here is one, but a dangerous one, right? Yeah, I mean, this is very interesting. And I think like every pension system, the Australian pension system is complicated. And I'm sure there are nuances to it that

I certainly haven't appreciated. And the way the tax relief works and all the rest of it is slightly different. But the Australian pension system is regarded as being a sort of exemplar for the rest of the world, basically because they introduced auto enrolment in the 1990s and then were able to afford to keep putting it up. So their auto enrolment is something like 12% now. And it basically means that most Aussies have a decent personal pension.

And the problem is obviously is that once you reach a kind of tipping point, the government stops trying to encourage you to save and then starts looking at all those pots that you've built up and starts thinking, man, that's our money. You know, that's just the way the governments think. And so the fact that there's a kind of handful of people who've built up like really massive amounts in these savings pots means that the

The current government is thinking, well, there must be a way for us to get our hands on that. And so the issue is that they've introduced this, or they are trying to introduce this new ban on savings of above 3 million Aussie dollars, which is about 1.4 million British pounds. And again, the issue is that for the first time they're taxing unrealised capital gains. So...

It's a bit complicated the way they work it out, but basically the portion of your money that is above three million, they then attribute the same portion of gains in a year to that bit of your pot. And it means that you get hit with a tax bill for that, whether or not you've sold the assets that are involved. And one of the big problems for the Australians in particular is that the farmers there often keep their farms in their pensions.

So they're sort of facing the similar issue to the inheritance tax over here, whereby the farm is worth a lot of money, but it doesn't generate any real money. And so you're going to come across all these liquidity problems and all the rest of it. But really the big issue is the principle, as you say, it's the idea that the governments have generally shied away from this because it tends not to work whenever they've tried it.

But the fact that we're going into another cycle of trying all of these stupid ideas again is kind of worrying. Yeah, the whole idea of taxes to make them simple and straightforward, which is why we normally tax stuff at the point of exchange, right? We tax transactions, we tax money when it's moving, when it's going from employer to person, when it's going from company to person via a dividend, when it's...

being pulled out of a pension when you sell something. Trying to tax things when they're not exchanging hands is very difficult, which was why wealth taxes never really work, etc. And why we always replace a wealth tax with the transaction tax of some kind in the end. So it does seem a very backward facing move, but, but,

but back to Angela Rayner and her memos you know we gather that she was looking for Rachel Reeves to have a go at another three or four billion a year by doing you know some stuff a bit like this there's other things like scrapping tax-free dividend allowance and extending the freeze on the 45% threshold this kind of thing is eventually inevitable because I mean it's fiddling around the edges of course the only answer to raising a lot more tax in the UK is to expand the tax base and that's a much longer conversation than we're going to have today but the

The other thing that apparently she's keen on is this idea of reinstating the lifetime allowance on UK pensions, which is not quite the same as you've just described. But again, leads us into admin hell. Yeah. You're reintroducing it whenever you scrapped it in the first place because it was causing all of these problems at the top end of the public sector. That's why they got rid of it in the first place.

And I mean, actually, this is the issue with pension schemes across the world, actually, because there's an element of this in the Australian one as well. It's like the public sector employs all of DB pension schemes. And usually whenever you mess about with a lifetime cap and all the rest of it, those are actually the first people that get caught by it because their pensions are so generous. And so then there's the whole political kind of...

fight over actually we can't tax these people but we want to tax these people in the private sector and it's like well how do you do that? I mean that's why we ended up with employer national insurance getting raised in the budget rather than anything else because that only falls on private sector employees and companies and you know the public sector was kept safe from it. Again it's one of these

the issues that starts to take you down into the idea there's a favoured group of people and an unfavoured group of people who will pay for everything. We know that's true though. I mean, that's been true in the UK for a while. It's just getting more divisive like that. It's getting worse and worse. Obviously, the more stretched the public finances become.

There are so many people who are untouchable. It is interesting, this whole idea that the rich don't pay enough tax, the highly paid don't pay enough tax, etc., and they must pay more and more and more. And you know there's been discussion around this idea that everything was better back in the 60s and 70s when tax rates were higher. And then, of course, is it Dan Needle who's done this number and shown that back in the late 1970s, 78, 79, when...

The highest income tax rate was 83% and the highest tax rate on unearned income was 98%, for heaven's sake.

The top 1% only paid 11% of the tax in the UK, whereas now, many, many, many years later, with rates ostensibly significantly lower, they were 29%. The top 1% paid 29%. That's wild that it used to be 11%. I've got Dan's thing on my long reading list. It is worth reading. You know, 1% paying nearly 30%.

I think maybe that brought his shoulders at carrying quite a lot there. Yeah, it obviously are. And especially in terms of income tax. There's the super, super wealthy and the 0.01% of whoever who still do pay a lot of tax and also generally create a lot of jobs, build things, et cetera, et cetera. But once you're getting down into the 1% and they're paying 30% income tax, that can be...

That is PAYE employees at the peak of their career.

in lots of ways and this sort of goes back to the thing that we discussed in one of our podcasts earlier this week where we got an email from a youngish guy who was basically earning lots of good money but feeling actually what is the point in carrying on working hard because I'm going to get bitten in the backside every single turn if I earn any more than I get just now so yeah it contributes to that lack of

Desire, he...

you know, maintain your ambition. Incentives, incentives, incentives, incentives. And I think sadly, John and I have very little optimism that this one will turn around. So watch out for more slightly admin heavy and irritating and probably pointless taxes coming in the UK. And before we go, one last thing to say is if you're interested in what John was mentioning earlier about bond yields around the developed world rising, please do listen to tomorrow's podcast where we will be talking about that at some length. It's very, very important.

Thanks for listening to this week's Merrin Talks Money Market Roundup. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter at MerrinSW and John underscore Stepak. This episode was produced by Sam Asadi, production support and sound design by Moses and Dan. Questions and comments on this show and all our shows are always welcome. Our show email is MerrinMoney at Bloomberg.net.

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Thrivent can help you plan your finances for the people, causes, and community you love. What makes Thrivent different? Financial services and generosity programs are combined to help you build a financial roadmap for the future while also creating opportunities to give back along the way. Visit Thrivent.com to learn more. Thrivent is a free app for you to use.

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