UK investors should put more money into “productive assets” at home, Rishi Sunak says. The Prime Minister has made tackling this weakness an economic priority. So with the next election at most 18 months away, how is his government doing? It would be unfair to describe its efforts so far as a nothingburger but they are a long way from a full meal.
The strategy has involved a long menu of reforms to encourage investment by insurance companies and pension funds. The most high-profile of these have been the changes to the Solvency II capital regime for insurers.
Sunak inherited the proposed reforms to the EU regime, which Boris Johnson had enthusiastically promoted as a Brexit dividend. They have been pushed through despite stiff opposition from the Prudential Regulation Authority, which is concerned about protecting policyholders and will have a lot of leeway over how they are implemented.
Final detail in some areas has yet to be agreed but the Association of British Insurers is bullish and says the reforms “will enable £100bn to be invested in a greater range of productive assets over the next 10 years”.
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Privately some insurers are more cautious. The rise in interest rates has dramatically reduced the benefit from the changes to the “risk margin” in Solvency II and the effect of the other reforms is likely to be “pretty marginal”, according to the head of one big insurer.
“If only they had done it two years ago,” says the chief executive. As for it being a Brexit dividend, the EU is implementing similar reforms more quickly than the UK.
The other main thrust of the government’s strategy targets pension funds, which in recent decades have slashed the amount they invest in UK equities.
Ministers are particularly focused on low investment in unlisted equities. They argue that this not only harms the UK economy but also reduces the returns for pension scheme members.
In his Mansion House speech on 10 July, Chancellor Jeremy Hunt gave a long list of steps the government is taking. Yet most consisted of further consultations or sketchy ideas he promised to flesh out in the autumn.
The one concrete measure announced on the day was the voluntary agreement brokered by Nicholas Lyons, the lord mayor of the City of London, under which some of the UK’s largest pension firms committed to allocate a minimum of 5% of their default defined contribution funds to unlisted equities by 2030. Dubbed the Mansion House Compact, the agreement aims to unlock more than £50bn of capital by the end of the decade.
The Chancellor described the agreement as “a great personal triumph” for Lyons, who has worked hard on the pact for some months.
His initial idea to force pension firms to put 5% of their assets into a new central fund ran into tough opposition from industry leaders, who baulked at being compelled to use members’ funds in a certain way.
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The lord mayor backed off and both the government and the Labour Party have made clear they will not use compulsion to direct schemes’ asset allocation.
Although this is surely right, it weakens any effect of the possible reforms.
For example, under the compact the firms commit to put 5% of their default fund assets into unlisted equities. It doesn’t, however, specify that these must be UK assets. The definition also covers stocks quoted on Aim, which includes companies such as veterinary services group CVS and tonic water maker Fever-Tree, and private equity buyout funds.
These are hardly the sorts of businesses starved of growth capital that the government is targeting.
Another government move is the lifting of the 0.75% cap on fees that firms can charge for their default defined contribution funds. Designed to protect members of auto-enrolled workplace pensions from being ripped off, the cap is seen as preventing such funds from investing in private equity and venture capital where the fees are higher.
Yet sceptics point out that few firms are pushing up against this ceiling and that putting more of their members’ funds into higher-risk assets will require a change in culture among cautious trustees.
Some campaigners argue that the key action the government should take is to drive more consolidation among the thousands of small pension schemes, which could result in more investment in illiquid assets.
This may well be right, but anything serious would need primary legislation, and it seems unlikely that the government will find time for that before the election.
None of this is to suggest that the government is wrong to focus on the issue. It is only that the likely effect of the moves made so far appears to be far outstripped by rhetoric.
As in many other areas, it may well be that the tough stuff will be left on the plate of a Labour government.
To contact the author of this story with feedback or news, email David Wighton
