Millions of pensioners and investors could sue the government if renationalisation of parts of the utilities sector took place at below market value.
The impact of such a move would be felt by the majority of pension funds in the UK, as well as overseas investors.
That is according to advisory legal firm Clifford Chance, which provides information to affected companies and investors on how nationalisation would work, and what would happen if Labour were to nationalise for below market value.
Dan Neidle, partner at Clifford Chance, explained: “If Labour tried to do it on the cheap, people could sue. This could be done in UK courts on the basis of a breach of human rights or where you have investors based somewhere like China, Hong Kong, Korea or Singapore, those countries have investment treaties with the UK which guarantee market value compensation for nationalisation.”
He said although it would be an unlikely option for an individual, it is a realistic option for a large pension fund.
Clifford Chance is advising a number of investors on their potential claims.
“I expect everyone with a pension must have some of their pension invested in one of these companies. It’s inevitable there are listed utility companies in the FTSE and surely all pension funds are exposed to the FTSE. Some would lose out a small amount and others would be heavily invested and carry more of a loss.”
According to an Office of National Statistics survey pension funds hold three per cent of shares, but Neidle explained that is an inaccurate representation.
“Most pension funds don’t hold shares directly – only the very largest ones do. Most funds hold unit trusts, ETFs and other forms of funds. In reality UK pension fund ownership is something like ten per cent. That’s just UK pension funds, why aren’t people who live in the EU just as important as British pensioners?”
He said pension funds are “disproportionately invested in the utility sector” for the long-term steady returns that the water sector provides.
“All previous nationalisations have been for market value, if Labour try to do it on the cheap there would be a big problem. Most people would say it’s unfair and the pensioners who own those pension funds would be pretty unhappy if they bought an asset for £100 and now they’re getting £10 or £20 for it,” Neidle said.
UK investors would have the ability to sue through a UK court but Neidle predicts that the majority of the water industry would be held by people who benefit from overseas treaties.
“I think many pension funds think the government simply wouldn’t do this and leave them out of pocket but often they don’t invest directly but via an investment fund and they would be much more likely to get involved in legal fights.”
Many pension funds do not invest directly through equities, they invest through funds. This, Neidle said, has led to confusion about the numbers of pensions that could be affected by renationalisation.
“It’s really complicated. No government has ever tried to nationalise a profitable sector of this size or complexity in the UK. It’s never been done.
“It’s a bit like Brexit, it’s a very complicated legal thing and if you spend a lot of time doing it carefully, sure you can do it. But if you just go ahead because politically and ideologically you think it’s a good idea, but you ignore the complexity then it’s going to end badly.”
Labour is set to reveal more details about its nationalisation plans in its manifesto launch tomorrow (21 November).