The UK economy has a problem: it is performing badly compared to its peers. Growth has been stagnant since 2008 due to poor productivity.
Average annual growth in productivity has been just 0.3% over the past 15 years. This has contributed to one of the lowest levels of business investment among the G7 nations.
The dire situation is strange: the UK has the world’s leading financial centre in the City of London, and the second-largest pool of long-term capital after that of the US.
It has around £5trn in pensions and insurance assets, and a further £1trn or so in retail investment assets.
There has been too much focus on bringing fees down and not enough on value and net performance after costs
With crumbling schools and creaking railways, the country should not find it hard to attract investment in these assets. But it does, and that has prompted the government to introduce reforms to boost investment through both capital markets and pension funds.
A new report from thinktank New Financial examines how this might be achieved. It takes stock of the Edinburgh Reforms, which aim to make the UK’s financial services stronger, and of the Mansion House pensions agenda.
I urge everyone to read the report because some of the statistics about our economic underperformance are hair raising.
Less love for London
Take how attractive London is for investors. The number of UK-listed companies has virtually halved since 1997 and new issues have dropped by two-thirds. Also, the amount of money raised by new issues has fallen in real terms by a third. Last year was the worst year for new issues in real terms since 1980.
There are about 34,000 schemes, meaning the system is overly complex and fragmented
Even worse, the UK equity market is the only major developed market to have shrunk relative to GDP over the past 20 years. It has dropped from 104% of GDP to 94%, while the US has increased from 101% to 156%. So the UK stockmarket is now worth the same in real terms as it was a decade ago.
By contrast, early-stage investment in the UK has grown rapidly over the past few years but British growth companies rely on non-UK investors for 60% of their funding. That rises to more than 70% for deals larger than $100m (£80m). The limited availability of growth capital is pushing a rising number of UK companies to the US market for their listing.
Simply put, the UK is increasingly reliant on overseas investors for growth capital and investment in critical infrastructure.
New Financial suggests a need for scheme consolidation, a new risk culture and an increase in contributions
New Financial points out the gains from successful reform of both capital markets and pensions will be huge. It will unlock hundreds of billions of pounds of investment in productive assets and improve retirement prospects.
‘Quid pro quo’
Why should the UK pensions market change to facilitate capital investment?
The report argues the asset allocation of UK pension funds should not be mandated.
The UK is increasingly reliant on overseas investors for growth capital and investment in critical infrastructure
Yet it adds: “Given the generous £48bn in net tax reliefs paid by UK taxpayers on pension contributions in 2021 (more than the entire defence budget), it is not unreasonable that there should be some form of quid pro quo.”
I can see the merits of this view. The fact is, the pensions market also needs to change to boost retirement prospects for savers. There has been too much focus on bringing fees down and not enough on value and net performance after costs.
There are also about 34,000 schemes, meaning the system is overly complex and fragmented.
What reforms would work? New Financial suggests a need for scheme consolidation, a new risk culture and an increase in contributions. All of these would make the UK pensions system simpler and improve returns for members.
Some of the statistics about our economic underperformance are hair raising
On capital markets, it says wider reform is required to make the UK more attractive to investors generally: brave and far-sighted policies that make housing, transport and energy cheaper in the long run.
This is how the UK can solve its twin crises of a patchwork pensions landscape and chronic underinvestment. There is everything to play for.
Michael Klimes is former news editor
This article featured in the October 2023 edition of MM.
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