11th December, 2012: A Financial Transaction Tax would not adversely hit pension funds according to a new report published today by the Network for Sustainable Financial Markets. Instead the introduction of a levy of 0.1% on equities and bonds and 0.01% on derivatives should help safeguard pensioners’ investments through reducing short-term speculative activity and encouraging a return to more long term investments with more appropriate risks.
The report by three international pension and financial experts argues that pensions should not be exempt from the Financial Transaction Tax which is due to be introduced next year in at least twelve European countries, including the big economies of Germany, France, Italy and Spain. The experts warn that if pension funds are exempt others would exploit the loophole reducing the revenue raised and the FTT’s ability to contribute to a more stable, less short-term focused market.
A tiny tax applied every time a share or bond is bought or sold, the FTT could raise up to €37bn per year. For pension funds making more traditional long term investments, turning over their portfolio on average every two years, the FTT will add a negligible cost which will be largely absorbed by asset managers competing for pension fund clients.
The impact of FTT will be felt most by High Frequency Trading where shares can be bought and sold hundreds of times a second and an entire portfolio can be turned over in a day. The tax would curb the excesses of High Frequency Trading thereby improving market stability – and helping to boost pensions.
According to the report the FTT should also help reduce the turnover of assets amongst pension funds which can contribute to management costs of between two and 20%. It is these fees - reaped by intermediaries such as advisers, managers and brokers regardless of whether or not it is a sound investment - that are having a major impact on pensioners’ returns.
“The rate for the Financial Transaction Tax is set so low precisely to avoid hitting longer term investments such as people’s savings and pensions. Far from being a ‘tax on pensioners’ it will help secure pensions by encouraging longer term investments and reducing costly management fees,” said Jack Gray, one of the authors of the report and Adjunct Professor at the Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology Sydney and an adviser to pension funds in Australia and overseas.
By improving market stability and reducing the frequency of crashes, the FTT will help decrease the likelihood of future crises and sustained periods of decline in output, mass redundancies and increased unemployment linked to crises. An FTT would therefore also make an indirect contribution to keeping people in work and paying into pension funds.
“The beauty of the FTT is that it has both market-shaping and revenue-raising functions. The FTT will help create a fairer market that is fulfilling its economic purpose and working in the interests of pensioners and long-term investors while raising vital funds to kick-start national economies and help the poorest counties cope with crises they did nothing to cause” said Stephany Griffith-Jones, Financial Markets Programme Director at the Initiative for Policy Dialogue at Columbia University.
For more information please contact NSFM’s Executive Director, Cary Krosinsky cary[at]sustainablefinancialmarkets.net