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A* EPQ Essay
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Essay of 17 pages for the course 2S The Making of Modern Britain at AQA (A* EPQ Essay)
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Ben Patrick. Centre number: 39222. Candidate number: 2141Is it feasible for the UK to create a Sovereign Wealth Fund?
Contents
Abstract 2
Introduction 2
What is a Sovereign Wealth Fund? 2
Purpose of this investigation 2
Outline of this essay 3
The conditions of ‘feasibility’ 3
Assessing an appropriate Sovereign Wealth Fund model 4
Withdrawal rules 4
UK policy objectives 4
Ageing population 4
Domestic infrastructure 5
Building a reserve fund for economic crises 5
Universal Basic Income 6
Summary: deciding upon a policy objective 6
Determining the type of SWF for the UK 6
Stabilisation and Savings Funds 6
Reserve Investment Funds 7
Development funds 7
Contingent pension reserve funds 7
Assessing the feasibility of different endowment proposals 7
Natural resources 8
Bonds 9
Outline of proposal 9
Criticism of bonds as a funding source 9
Judgement on bonds as an endowment proposal 10
Direct taxation 10
Foreign reserves 10
Sale of public assets 11
Summary: choosing an endowment proposal 11
Comparing a UK fund with an existing international Sovereign Wealth Fund 12
Outlining good governance 12
Identification of a comparable fund: the Australian Future Fund 12
Policy objectives of the AFF 13
Initial endowment 13
Governance structure 13
Conclusion 14
Bibliography 14
1
,Ben Patrick. Centre number: 39222. Candidate number: 2141
Abstract
This report assesses the feasibility of establishing a UK Sovereign Wealth Fund by
comparing it against specific economic and political feasibility criteria. It considers existing
policy objectives, fund models, endowment proposals and aligns UK challenges with the
functioning of the Australian Future Fund. The report concludes that a £100 billion British
Sovereign Wealth Fund, funded through borrowing, can be established without major
economic or political difficulties to address future unfunded public-sector pension liabilities
stemming from an ageing population.
Introduction
Sovereign Wealth Funds are of increasing importance in the global economic system,
holding $11.4 trillion in assets in 2022, with this figure projected to rise to $17.3 trillion by
2030 (Global SWF, 2023).
Under these conditions, it is natural to question the potential, or as this essay will discuss,
the feasibility, of a British Sovereign Wealth Fund.
What is a Sovereign Wealth Fund?
Andrew Rozanov (2005) coined the term ‘Sovereign Wealth Fund’, abbreviated as SWF, to
describe a public-sector investment authority, typically formed from budget surpluses, with
the objective of supplementing fiscal policy objectives, either through its investments or by
the Government withdrawing a small percentage of its returns.
There exist disagreements in academia over what constitutes a Sovereign Wealth Fund, with
many mistakenly confusing Public Pension Funds as the former. In this essay, a SWF will be
categorised as such if it follows the essential terms that Cohen (2009) outlined:
1. It must be state-owned
2. It must hold no significant liabilities
3. It must be managed separately from central bank reserves
This rules out other institutional investors, such as national banks, who violate the second
term, from being characterised as SWFs. Therefore, organisations which do not meet the
above criteria will be excluded from the discussion in this investigation.
Purpose of this investigation
This investigation is not an analysis of whether the UK should start a Sovereign Wealth
Fund, nor is it an evaluation of how a UK fund should organise its investments.
Contrastingly, this investigation seeks to determine the feasibility of a UK fund.
This is for two principal reasons. Firstly, giving appropriate detail to all aspects of a
prospective British SWF would be impossible for a report of this size. Secondly, it would be
pointless in any case to discuss the investment strategy of a British SWF if we arrived at the
conclusion that it would be unfeasible for the UK to create its own fund.
2
, Ben Patrick. Centre number: 39222. Candidate number: 2141
The aforementioned topics will be touched upon; after all the reasons why the UK would
want to create its own SWF would influence the potential likelihood, and thus feasibility, of
the fund.
Outline of this essay
As mentioned, this investigation seeks to determine the feasibility of a UK Sovereign Wealth
Fund and is split into 3 sections before coming to a conclusion:
1. Assessing which models of SWF are feasible for the UK based on its policy
objectives
2. Analysing various potential endowment1 sources and quantities for the SWF
3. Comparing an international SWF with UK conditions and existing institutions
The conditions of ‘feasibility’
The first type of feasibility that this investigation will assess is the economic feasibility, which
we can apply the following terms to:
1. The economic conditions that are required to start the fund can be met without
significant difficulty
2. Any endowment proposal would not significantly disrupt capital2 or money markets,
or in any case the financial benefits over a middle-long term horizon would outweigh
the short-term losses.
3. The designated investment strategy of the fund offers expected returns in the
medium term
But importantly, the political feasibility of a fund must be considered, which is outlined as
follows:
1. The purpose of the SWF matches current or forthcoming UK policy objectives
2. The endowment proposal is politically palatable
3. The required governance for a successful fund must match existing major UK
financial institutions
The second point can best be illustrated with the following scenario: the proposition of a 5%
uplift in basic income tax to fund and sovereign investment body with no short-medium term
benefits, and thus no popularity come election day, would be impossible for a politician to
accept.
Therefore, both economic and political feasibility must be assessed to properly determine
whether it is feasible for the UK to create a SWF.
1
initial funding
2
bond markets and foreign exchange (FOREX) markets
3
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