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Financial Transaction Tax will help long-term pension fund investment – new study

Report shows how FTT fits with responsible investment

Plans to introduce a Financial Transaction Tax (FTT) in 11 European Union member states next year will help, not harm, long-term pension fund investment, according to a new study.

The report is called No Exemption: The Financial Transaction Tax and Pension Funds and it has been published by the Network for Sustainable Financial Markets, the international collaborative network.

It has been written by Jack Gray, Stephany Griffith-Jones and Joakim Sandberg, who argue that pension funds should not be excluded from the FTT.

They are, respectively: Adjunct Professor at the Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology Sydney; Financial Markets Director at the Initiative for Policy Dialogue, based at Columbia University in New York; and Associate Professor of Practical Philosophy at University of Gothenburg, Sweden.

“The FTT fits with responsible investment over longer-term horizons by discouraging funds from ‘inappropriate’ turnover in favour of more traditional and stable forms of long-term management,” the paper concludes.

The paper argues that the tax would not materially affect pensioners and would bring broader benefits by nudging funds towards longer-term strategies and reducing de-stabilising elements such as high frequency traders. Any costs would be absorbed by asset managers competing for pension fund clients.

The controversial tax would also reduce the costs associated with portfolio turnover and help reduce the likelihood of market crashes and associated ‘credit crunches’ – and increase capital flows to the real economy.Gray, Griffith-Jones and Sandberg say a 0.1% trading tax is “extremely modest” compared to the estimated 2% and above of pension fund contributions that are absorbed by costs. The “tiny tax” applied every time a share or bond is bought or sold could raise up to €37bn per year, they argue.

“The FTT fits with responsible investment over longer-term horizons”

“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 Gray.

“The beauty of the FTT is that it has both market-shaping and revenue-raising functions,” added Griffith-Jones. The tax would “help create a fairer market” working in the interests of pensioners and long-term investors.

The trio also points out that historically low interest rates have a far greater cost for pension funds than an FTT.

The FTT is one of a number of work groups at the NSFM. The others include climate change and long-term investors, commodities, fiduciary duty, governance and housekeeping, risk and systemic stability, wealth management industry and regulatory reform.
The network last month appointed Cary Krosinsky as its first Executive Director. He was until recently Senior Vice President, North America at environmental data firm Trucost.