London ‘left behind’ by financial rival cities

Stifling rules and costly political meddling holding Britain back, says leading investor

LONDON is falling behind rival financial centres as a result of overregulation and misguided political interventions dating back to Gordon Brown’s tax raid on pensions, the chief executive of Britain’s biggest investment company warns today.

Sir Nigel Wilson, the head of Legal & General, says that Britain largely missed out on the technology boom of the early 2000s and risks being left behind again.

He tells The Daily Telegraph that the entrepreneurship in British universities is “off the scale” but that we are no longer competing on a “global level” to back fledgling businesses wishing to raise money. Sir Nigel says pension funds are eschewing stocks for safer but less lucrative assets such as bonds, in a problem known as de-equitisation.

Figures released earlier this year by New Financial, a think-tank, showed that 53 per cent of pension funds’ total assets were invested in UK stocks in 1997, but this plunged to six per cent in 2021 as money was shifted elsewhere.

As a result, British pension funds and insurance companies now own 4 per cent of the stock market, down from 39 per cent in 2000. The trend risks undermining the economy while also leading to lower returns for workers saving into pension funds. Jeremy Hunt, the Chancellor, has said “pensioners and future pensioners are not getting the returns that they could expect”, and is planning to set out reforms later this year.

Sir Nigel says: “We have so many start-ups – the degree of entrepreneurship in our universities is off the scale.

“However, we haven’t got a capital system for these people to be successful in the way the US has. Being better than Europe should not be the benchmark.

“There isn’t a European capital market equivalent to New York, London or Hong Kong, so we’ve got to make [the system] function much better. The UK and London are falling behind.”

Separately, Labour last night backed calls to set up a £50bn “growth fund” that pension funds would be told to invest 5pc of their assets in.

Rachel Reeves, the shadow chancellor, told the Financial Times that her party was prepared to force schemes to invest if they would not do so willingly.

In the coming days, The Daily Telegraph will detail concerns about the pensions market, from the damage of low levels of investment to economic growth, to the risk that poor returns will condemn a generation to poverty in retirement.

Other countries, such as Canada and Australia, have taken a less conservative approach to investing and performed strongly. For example, the Ontario Teachers’ Pension Plan last year made a 4 per cent gain on its investment despite turmoil in global markets.

Sir Nigel said pension funds are leaving the stock market as a result of accounting standards tightened after a scandal at Robert Maxwell’s newspaper empire, as well as Mr Brown’s move to increase tax on fund dividends.

A Treasury source said: “The Chancellor is still working through a lot of different options.”

The mysterious death of newspaper tycoon Robert Maxwell, whose body was found floating in waters off the Canary Islands in November 1991, brought down his family’s media empire. In the months that followed, it also spelled the end of an era for UK pensions.

After the 68-year-old died, it transpired that £460m had been fraudulently appropriated from the Mirror Group’s pension fund to prop up Maxwell’s debt-laden companies.

The criminal disclosures helped to drive a massive rise in red tape in the retirement industry during the 1990s, making funds more risk-averse and reducing their exposure to the stock market and early-stage companies.

Well-intentioned rules now govern every aspect of how savers’ money is invested, from strict accounting regulations to limits on the kinds of assets that can be held.

The result, say critics, has been economic stagnation and foreign ownership of some of Britain’s best companies, punctuated by a steady drumbeat of pension scandals – from British Steel to BHS – that no crackdown has been able to prevent.

On the upside, the industry is waiting to deploy billions of pounds of capital. Reform could unlock a wave of investment by a £4.6 trillion industry – and help turbocharge the British economy as it struggles out of crisis.

Michael Eakins, chief investment officer at FTSE 100 pensions business Phoenix Group, says scrapping red tape will create an environment where new companies can be “founded in the UK, developed in the UK and listed in the UK”, boosting the economy and creating jobs.

Eakins adds that the Maxwell saga “led to much more control in terms of what pension funds could invest in”.

He says: “Over the past two to three decades, there has been a consistent and persistent de-equitisation of UK pension funds and insurers and it absolutely is a concern, manifesting itself in terms of the impact on and the standing of the UK economy as a place where companies want to come, start themselves up and evolve.”

The data speak for themselves. Between 1997 and 2021, UK pension funds cut their exposure to UK shares from 53pc to just 6pc, according to a report by think tank New Financial. And since the turn of the century, the share of the UK stock market owned by UK pensions and insurance companies also collapsed from 39pc to 4pc.

Nigel Wilson, chief executive of Legal & General (L&G), the UK’S biggest pensions manager, blames the de-equitisation on new accounting rules in the wake of Maxwell’s death and Gordon Brown’s decision to charge higher taxes on dividends. In 2000, a new accounting standard known as FRS17 obliged companies to report the market value of their pension funds on their balance sheet.

Startled by the size of pension liabilities, company boards rushed to shut many defined benefit, or finalsalary, schemes and shifted their investment strategies away from stocks and into lower-return, lowerrisk government and corporate bonds.

The New Financial report shows that UK pension funds have quadrupled their allocation to bonds to 56pc over the past 25 years. The shift into bonds heralded a new era of “liability-driven” investing (LDI), which was regarded as a safe and fool-proof strategy until Kwasi Kwarteng’s ill-fated mini-budget last

‘We became obsessed with housing in the ’60s and ’70s and somehow viewed price inflation as a good thing’

‘Being better than Europe should not be the benchmark – we have to compete on a global level and we are falling behind’

year caused debt prices to plummet, leaving some retirement schemes on the brink of collapse.

Meanwhile, in Brown’s first budget in July 1997, the then Labour chancellor staged a raid on pension schemes by axing dividend tax credits of 20pc. “Those events collectively really reduced the risk appetite and increased the regulatory oversight on the UK pension industry in a fairly profound way,” says Wilson.

Hendrik du Toit, chief executive of FTSE 250 asset manager Ninety One, concurs, adding that the UK has done itself a disservice by adding more regulation on top of EU rules as well as shunning investment risk. Not every country has adopted the UK’S conservative approach. Canadian and Australian funds have more freedom to invest in higher risk assets. The results have, on the whole, been positive.

Wilson says: “Australia and Canada have been ahead of us for a long time, while the US has a very equity driven culture. We became obsessed with housing [as an asset] in the ’60s and ’70s and somehow viewed house price inflation as a good thing. But we never created that equity culture. So we made housing sexy but pensions dull.”

He also bemoans a sense of inertia in Britain towards saving and investing, noting that out of L&G’S near-five million defined contribution customers, only about 1,000 change their portfolios each month. Both Wilson and Eakins are calling for a cultural shift to embrace greater risk. Among reforms they hope for include giving pension funds a mandate to invest a percentage of their capital in growth equity and infrastructure, as well as exclude performance fees from a cap on pension charges.

Phoenix’s Eakins says: “The charge cap means you can’t invest in strategies that have an element of performance-related fees. That prevents savings and retirement providers such as Phoenix from investing in asset classes like venture capital or early stage growth capital.

“If you’re taking a multiple-decade time horizon, having an allocation to venture capital and private equity is absolutely appropriate. These asset classes have a demonstrable track record of paying supernormal returns.”

Jeremy Hunt, the Chancellor, has not ruled out telling funds where they should invest some of their capital, but has said he is not “instinctively comfortable” with the idea. And not everyone in the industry is keen on it.

Morten Nilsson, chief executive of the BT Pension Scheme (BTPS), one of the UK’S largest private sector retirement schemes which recently rebranded as Brightwell, says: “Pension schemes need the freedom to invest in the very best way to meet the needs of scheme members.”

Hunt is preparing to make an announcement on pension reforms by the autumn, which is likely to include plans to consolidate the fragmented industry, bringing it more in line with the likes of Canada. The Chancellor is understood to be increasingly focused on the UK’S 28,000 definedcontribution schemes.

Experts argue that the demise of the UK’S markets is inextricably linked to its inability to benefit from its sizable pensions industry. London has struggled to retain tech darlings such as Cambridge microchip designer Arm, which announced earlier this year that it would snub the London Stock Exchange in favour of New York.

Wilson, who has been tasked by the Capital Markets Industry Taskforce to lead a report into how to make London more globally competitive, says: “We missed the technology bubble in 2000 when a lot of the great companies of today were formed and have scaled up. America has ended up with a huge amount of scaled-up businesses.

“We have so many start-ups – the degree of entrepreneurship in our universities is off the scale. However, we haven’t got a capital system that is set up for these people to succeed in the way that the United States has.”

Wilson says Britain needs to be more ambitious. He says: “Being better than Europe should not be the benchmark. There isn’t a European capital market equivalent to New York or London or Hong Kong, so we’ve got to make [the system] function much better. We have to compete on a global level and the UK and London are falling behind.”