Open the pension-fund floodgates
The chancellor should direct the UK’s retirement savings into the country they came from
Even if Jeremy Hunt hangs on until the next election, it seems unlikely that he will go down as one of the great growth chancellors. Appointed by Liz Truss during the catastrophic fall-out from her miniBudget, Hunt’s main task has been to clear up the mess, push through some unpopular tax rises, and restore the country’s reputation for fiscal stability. If he can avoid a full-blown recession on his watch it will be more than most people expected of him.
Even so, he has at least tried to kickstart growth again, deregulating the City through the so-called Edinburgh reforms. He has also taken the first steps towards unlocking the billions held in pension funds to direct them back towards investment in the UK. The latter move has not been universally popular. Last week, Matthew Moulding of e-commerce firm THG laid into the plans, arguing that the money should be looking to earn the best returns globally, not used to help out the London Stock Exchange. In private, there are probably plenty of people in the City who agree. Running a pension fund, especially when lives are getting longer, inflation is rampant and returns on investment are meagre in most major markets, is difficult enough. Boosting the UK’s rate of growth is a task that can be safely left to someone else.
Still, there is a case to be made, not just that pension funds should be allowed to invest in a wider range of UK assets, such as infrastructure projects, for example, but that they should also be encouraged to start putting their money into British equities again. There has been a dramatic decline in the amount of money that UK funds put into the London stockmarket over the past two decades. Rewind 20 years, and 50% of pension funds cash was invested in the UK. In the years since then, it has fallen to 6%. There are reasons for that. Funds have been forced to invest more conservatively, and that has meant putting more money into bonds (and in fairness, bonds have been on a tremendous bull run for most of those two decades). And they have also been looking to spread their risks, which they can only do by putting money to work abroad.
The trouble is, this has created a vicious circle. One of the main reasons the London market has been one of the worst performing major indexes in the world is because the British pension-fund industry has largely abandoned it. No one invests any more, the index goes nowhere, more and more funds de-list, the performance is dismal, and the funds cut their investment even further. Once you get caught in that trap, it’s hard to see a way out.
Creating a virtuous circle
A simple solution would be to mandate that 25% of pension-fund assets have to be invested into UK-quoted securities. After all, the industry has been hugely helped by auto-enrolment, which forces just about everyone to pay into a personal pension scheme, so it hardly seems unreasonable to ask that at least a quarter of that money is invested in the country where it was raised.
That would have three big advantages. First, it would help the City, especially as it tries to establish a new space for itself outside of the EU. Next, it would help the economy, because a lot of that extra crash would flow into fresh investment, creating new jobs, and more opportunities for smaller businesses. Indeed, the beneficiaries would benefit twice over; first from better returns, and second from living and working in a more prosperous country.
Finally, it would help attract a lot more money into the UK. As the stockmarket and valuations rose, global investors would start to find Britain a far more attractive destination for their cash, pushing valuations higher, and making it far easier for British companies to raise capital. Instead of being in a vicious circle we would be in a virtuous one instead.
The pension-fund industry is huge, with an estimated £2.5trn to £3trn in assets under management, and a quarter of that returning home would make a massive difference. The chancellor is demanding too little from the industry. He should ignore the critics and be a lot bolder – and direct a flood of pension money to the UK market.