Irregular Roundup, 20th August 2024

We begin today’s Irregular Roundup with Chat GPT.

ChatGPT  analysis

Joachim Klement looked at using ChatGPT to analyse earnings calls.

• The researchers first asked chat GPT to determine whether a Q&A session was “unusual”.

If the Question-and-Answer session is classified as ‘unusual’, state ‘unusual’ and provide a justification for this classification.

Next, they asked chatGPT to classify the unusual sessions by category.

The result was a classification system of 25 types of unusual interactions.

N in the table is the number of unusual calls and Q50 is the percentage.

The most common unusual communications were lengthy responses by executives and detailed discussions of non-financial topics. That is how executives try to cover up negative news.

Armed with this classification, the researchers could ask chatGPT to analyse any earnings call against this framework.

Joachim gives some examples of the responses:

• “There is a noticeable avoidance by management to provide specific details on the 6 global fitness redesign initiatives, despite being pressed by analysts.”
• “Management seemed unprepared to address the specifics of the sales guidance changes for Advance Pierre and Chicken, as indicated by the need to follow up after the call [24].”
• “There is a moment of conflicting information regarding the acquisition expenses for Esterline. Michael Lisman mentions higher-than-typical expenses due to the size of the acquisition, but Kevin Stein then says the fees are not different than expected, which Lisman confirms.”

Companies with unusual communications underperform around their earnings calls (since human observers can also spot the inconsistencies).

But no investor can listen to all earnings calls all the time and this simple methodology provides investors with a systematic toolset to analyse companies of interest and assess the weak points of their earnings reports.

I wonder how the wider dissemination of such tools (hopefully soon) will affect earnings calls.

Pensions tax relief

There were press reports that the Treasury has suggested that Rachel Reeves look at replacing pensions tax relief with a flat 30% rate.

• Reeves has previously written and spoken in favour of a flat rate, but more recently said that she has “no plans” to change the current arrangements.

Morally, I have no objection, but it’s bound to reduce contributions from high-rate taxpayers.

• With 30% relief on the way in, and 20% tax on the way out, waiting 35 years to get your money back is not such a great trade.

It could be sold as a boost for basic rate payers, but the limiting factor here is usually a shortage of funds to save, rather than a mean rate of tax relief.

The change could also have implications for salary sacrifice schemes (which allow employees to make tax-efficient contributions via their employer) and for employer contributions in general.

• One potential change would be to restrict NIC relief on pension contributions.

There are also considerations for defined benefit schemes (which remain popular in the public sector).

• If relief is less than the higher rate, employer contributions to DB schemes would constitute a taxable benefit to higher-rate employees.

This would mean tax charges either on wages or the pension fund (meaning smaller pensions).

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This debate comes down to what you see as the purpose of (private) pensions.

The primary function is to remove a burden from the state, by persuading people to save enough money to self-fund in retirement.

• Beyond that, we need to incentivise our most productive (highest-paid) workers to work hard.

The tax system is already pretty tough on the middle classes (let’s call them the £50K to £150 pa group), and the £60K annual allowance for pension contributions is one of the few bright spots.

•  If I were in that group and thirty years younger, I would be looking around for other countries that might appreciate me more, or looking to downshift my life.

Neither of those options is good for the UK, or Labour’s claimed growth agenda.

Means testing the state pension

Bizarrely, there are more Labour scare stories since they won the election.

• This week’s worry was means-testing of the state pension (from which I can see no justification – Labour doesn’t seem to have mentioned this).

Adverse demographics (more old people) and the triple-lock (which ensures that the State Pension slowly increases, albeit from a historically low base – and to which Labour is committed) mean that the cost of the SP is going up.

• If we want to cap the cost, we need to limit the number of people receiving it.

The traditional way to do this has been to raise the state pension age (SPA), which is now heading for 68 around 2045.

• Means-testing would be an alternative, but applying it retrospectively (to pension rights that people have already accrued through their NI contributions) would be tricky.

Introducing a new state pension alongside existing entitlements would be morally superior, but almost as unpopular politically.

• Even then, changes to the UK pension system usually arrive with at least ten years of notice (and even that doesn’t guarantee an absence of controversy – witness the WASPI campaign).

This notice means that there would be no quick benefits to the current government, and so it’s hard to see this as a priority for a new administration.

In Money Week, Marryn Somerset Webb argues that means testing also comes with practical issues:

To test anyone without a DB pension (or with a DB and other things too) for income purposes you would need to test it against not just current income from their pension assets, but also against their potential income.

Think how fast you would find everyone with a defined-contribution(DC) pension shifting their assets from dividend-paying income stocks into growth stocks if you did not.

That does sound messy, but I had assumed policing would be done via tax returns, with those straying into the high rate band losing some of their pension.

You’d also have to look at anything held outside a pension – and in particular at where income could be generated. So houses, paintings, jewellery – anything that could be sold for the cash to be held in income-generating assets.

This sounds very extreme.

• Merryn predicts downsizing, but this would only happen in the narrow band where losing the £10K pa of SP is critical.

I can’t see multi-millionaires giving up a couple of bedrooms to hang on to the SP.

It would also distort incentives. Why save elsewhere and stick to being auto-enrolled in a private pension if that income might end up reducing your state-pension income? Also, if it were to be remotely fair, means-testing would have to be hugely administration-heavy, complicated and intrusive. It would be almost like preparing for a wealth tax.

Certainly, the incentive to spend not save would increase.

Tax burden

On the IFS site (in an article originally published In the Times), Paul Johnson reminded us that although the UK tax burden is at a high, it falls mainly on the top one per cent.

As Jeremy Hunt put it in his last budget:

The average earner inthe UK now has the lowest effective personal tax rate since 1975- and one that is lower than in America, France, Germany or any G7 country.

Paul comments:

It is from average earners that higher-tax countries in western Europe get much of their extra revenue. 

Yet here in the UK:

The basic rate of income tax has come down from 35 per cent to 20 per cent over the past 50 years. The tax-free allowance is being squeezed, but it is still at historically high levels. And while, at 8 per cent, the main employee element of national insurance is higher than it was in the 1970s, it is lower than at any time since 1982.

The average full-time salary in the UK is now £35K, and their tax bill is down by £2K since the Tories won power in 2010. So why is tax at an all-time high?

Lots of inflation has been good for VAT revenues. Corporation tax revenue has increased. A combination of income growth and freezing of thresholds has been good for the income tax we bring in from higher earners.

The top one per cent earn around £200K and are paying £10K more in tax than in 2009.

That top 1 per cent pay 29 per cent of all income tax now, up from 25 per cent in 2010 and 21 per cent at the turn of the century.

This is not because the rich have got richer.

Until 2010 the top tax rate was 40 per cent. There is now an income tax rate of 60 per cent on incomes between £100,000 and £125,140 and 45 per cent on income above that. [The old Tory government also] severely limited how much higher earners can put into a pension free of tax.

So if Labour wants to spend more, can it avoid hitting middle earners the hardest?

Quick Links

I have just one for you today:

1. Discipline Fund’s Three Things were bad ideas that won’t die, the “age in bonds” rule and weaponised ETFs.

Until next time.