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Should the UK have a Sovereign Wealth Fund?

This article is written by Matthew Eyton-Jones.

Many countries, including Qatar, Kuwait, Singapore, Norway and Australia, have well established sovereign wealth funds, most of which were set up to provide for a day when the income from natural resources like oil and gas runs out. This makes sense for countries that are heavily reliant on natural resources, but what about a country like the UK, which has a developed and diverse economy?

Given the size and diversity of its economy, the UK would at first glance appear to be very unlike these countries, and it might be hard to envisage what benefit establishing such a fund would bring. However, on closer examination there is a very strong argument for doing so.

The UK has traditionally suffered from low savings rates compared to other developed countries. In addition, a significant amount of unfunded liabilities, or debt, has been built up in the benefits system, principally in the form of state pensions, the healthcare system and the provision of long-term care for the elderly.

In addition, a sovereign wealth fund could also be used to help fund core infrastructure projects both across the UK and internationally.

This has led to generational imbalances, with younger generations having to pay for these costs on behalf of older people. Increasing longevity and demographic imbalances between the old and young mean that pensions, healthcare and long-term care costs are being paid over much longer periods of time.

In order to help solve this problem, a sovereign wealth fund could be established with the express aim of addressing these long-term liabilities, similar to the way in which occupational pension funds were established from the 1930s onwards to provide funded systems to pay the pension promises made to employees.

In addition, a sovereign wealth fund could also be used to help fund core infrastructure projects both across the UK and internationally.

Given the temptation for governments to adopt a short-term approach when it comes to financial planning, a UK sovereign wealth fund would need to be established with a strong constitutional and governance framework in place to ensure that it could not be misused for short-term spending by the government of the day.

In particular, such a fund would need to have a strong independent board of trustees with legal and operational independence, on similar lines to funded occupational pension funds. Whilst a sovereign wealth fund could be established relatively quickly, it would take several decades for it to become fully invested, defined as the point where the fund broadly matches the liabilities it is intended to cover.

The UK government should honour its 2017 General Election manifesto pledge and start planning for the establishment of a sovereign wealth fund sooner rather than later.

The views in this article are expressed by Matthew Eyton-Jones. This article will also be featured in the October issue of the Sovereign Wealth Quarterly.

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