Irregular Roundup, 3rd June 2024

We begin today’s Irregular Roundup with inflation.

Inflation

John Authers looked at a new UK inflation figure that was better, but not good enough.

• Headline inflation dropped to 2.3% – close to the BoE’s 2% target – as historic rises in energy prices dropped out of the equation.

But core inflation – excluding food, fuel, alcohol and tobacco is still at 3.9%.

That’s too high for a rate cut this month, and the interest rate market cut the probability of one from 50% to 15%.

Goods prices are now falling but the price of services is rising at 5.9% pa, and that rate looks sticky.

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John also looked at what markets have to say about Sunak’s election prospects (see below).

• He’s had a big impact on (or at least, presided over a remarkable decline in) the Misery Index (the unemployment and headline inflation rates added together).

But voters tend to remember crises, not recoveries.

Back in 1997, John Major’s government had had more than four years to recover from Black Wednesday in September 1992, when the sterling was forced to devalue. The economy turned around beautifully in that time. It didn’t avert a landslide for Blair.

Covid (and the parties) and the received wisdom that Truss’ unfunded tax cuts “crashed the economy” have probably done for Sunak.

Voters may not approve, but the UK stock market seems to like him.

Until that is, you look at the performance relative to the rest of the world.

• We’re down almost 50% since Cameron was elected in 2010.

Can Labour change things?

Rachel Reeves is a former BOE economist who is criticized chiefly for being over-cautious. If there’s a risk, it’s that Labour underwhelms, is forced to raise taxes, and the economy stagnates further. A Truss-style implosion is much less likely.

Stagnation and tax rises are what we should expect.

Rent controls

Commenting for CapX on an interview from the Independent’s Housing Correspondent with a Labour media platform, Kristian Niemietz reminded us that rent controls never, never work.

[Victoria Spratt’s] argument is that rent controls are, in fact, the norm. For most of the 20th century, Britain used to have rent controls of one kind or another. They were first introduced as an emergency measure during World War I, and later relaxed, but not entirely abolished until 1988.

She is right that rent controls are a common policy tool, but unfortunately, they don’t work.

The results are exactly what the Economics 101 textbook would predict. They lead to a decline in the supply of rental properties, a decline in housebuilding rates, a slowdown in tenant mobility, a misallocation of existing properties, and a decline in the quality of rental housing. 

Kristian references a meta-study in the Journal of Housing Economics which showed that around 80% of the impacts were negative.

The impact in the UK was also negative:

They led to a steep decline in the size of the private rental sector. Before World War I, the vast majority of the population (nine out of ten households) lived in private rental accommodation. By the time rent controls were abolished in the late 1980s, that proportion had dropped to less than one in ten. Since the abolition of rent controls, it has gone up to one in five again.

It’s true that housing affordability has declined since the 1980s, but:

House prices have trebled in real terms since the mid-1990s, due to a general housing shortage. It would be very strange if private sector rents were unaffected by that.

So what does Kristian recommend instead:

A series of planning reforms that unleash a private-sector building boom, which leads to an increase in housing supply across all tenures. 

Labour watch

So we finally have a date for the General Election (4th July).

• It’s hard to know why Sunak has called it early, other than he can’t see things getting any better before Xmas.

The chosen date is in the middle of the European football championships and soon after the BoE will likely not cut interest rates.

There was no market reaction, presumably because the result was seen as a foregone conclusion.

• Labour has a 20-point lead, and turning that around in six weeks would be the biggest political upset in UK history.

The Tories won’t win, but the size of the Labour majority (if they get one) may come down to how badly the SNP collapses in Scotland.

• A couple of years ago, you might have argued for a hung parliament on that basis (and possibly the dreaded Labour/SNP coalition) but the SNP has made a spectacular mess of things since then.

It’s a sad end to what might have been (before Covid and the Russian invasion of Ukraine) a better Tory government than we’d seen over the previous decade.

• Instead, this has ended up being the worst five years of the lot.

All I have to show for it is the abolition of the LTA.

We don’t know any more about Labour’s policies, but at least they now have to publish a manifesto.

• I’ve signed up for their mailing list to ensure that I get it as soon as it’s published, but all they’ve sent me so far are begging emails.

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Along with their plan for national service (not so daft as it’s being painted, though the timing is odd after fourteen years in government) the Tories have announced that they will introduce a separate personal allowance for pensioners so that the state pension won’t tip them into paying income tax.

• The “Triple Lock Plus” will add the same rules the pension uses (an increase of 2.5%, average earnings or inflation – whichever is higher) to the new pensioner allowance.

Laura Trott, chief financial secretary to the Treasury, said:

This government have always protected and will always protect the most  ulnerable. That has een our track record since 2010, and that is what we will continue to do.

Labour pointed out that the Tories have frozen personal allowances and tax thresholds in recent years. For the IFS, Paul Johnson said:

Pensioners used to have a higher tax allowance than working-age people, butsince 2010 the tax allowance for pensioners has been cut by more than 10 per cent while that for working age people has risen by 30 per cent.

I’d rather see personal allowances and thresholds rise for everyone, but it probably won’t matter as I don’t expect the Tories to win the election.

LTA watch

For the Telegraph, Tom McPhail (now at The Lang Cat, but formerly of Hargreaves Lansdown) wrote that not only will Labour restore the LTA, but they are coming for the pension freedoms.

Labour has never been hugely enthusiastic about the pension freedoms. While they cautiously accepted the reforms in 2014, a subsequent report commissioned by Rachel Reeves and published in 2016, highlighted the risks, cast income drawdown as high risk and proposed steering savers towards safer products.

Smaller pots in particular are being cashed in to meet short-term needs.

Research from the DWP shows people tend not toview an individual small pension pot in the context of their overall retirement savings, or their longer-term retirement income needs.

People also tend to underestimate their life expectancy and how much pension they will need (see below).

For all income drawdown pots worth up to £250K the commonest rate of income withdrawal is over 8% a year, which is highly unlikely to be sustainable.

I can’t defend that rate of withdrawal, but I’m not certain that the number of pots held by an individual is being taken into account here.

• I use UFPLS rather than drawdown, but my annual withdrawals form an increasing proportion of the pot I am running down (close to 30% this year) but only a small proportion (3%) of my total DC pot.

Tom highlights three potential changes from Labour:

1. increasing the minimum age at which you can access your private pension savings, pushing it up to perhaps age 60
2. putting restrictions on taking cash out, such as requiring you to first secure a minimum amount of guaranteed long-term income
3. some form of increased death taxes on larger pension accounts, such as making pension funds liable to inheritance tax

All three sound plausible to me and number two in particular would be tricky if it were to be imposed retrospectively.

Pot Size

For FT Advisor, Alina Khan wrote about research from PensionBee on pension pot sizes.

• 15% of the 1,000 people surveyed thought that less than £150K would be needed.

49% thought that £250K or more would be needed to survive for more than the average 15 years in retirement.

• The target income in retirement varied between £15K and £30K pa, including the State Pension, which seems reasonable.

Only 27% felt on track for their target, whilst 30% were unsure and 43% thought they were not on track.

PensionBee recommends the use of pension calculators to support people in working out how much they need.

For PensionBee, Becky O’Connor said:

It’s hard to plan for retirement without an idea of how much you might need, yet most Brits seem to be unaware of, or worse, dangerously underestimate the true cost of retirement. 

VCTs

HMRC data shows that VCT fundraising dropped 10% in 2022-23, to £1bn.

• I would expect VCT money to be diverted back to pensions following the abolition of the LTA but that was only announced in March 2023, so I was expecting 2023/24 to take the hit.

Quick Links

I have just one for you this week:

1. Alpha Architect looked at Quality, Factor Momentum, and the Cross-Section of Returns.

Until next time.