The UK economy badly needs a boost — and the government hopes the nation’s vast pension savings might deliver one.
UK finance minister Jeremy Hunt announced Monday that nine of Britain’s biggest pension providers had agreed to increase their investments in high-growth UK companies, a move that he said could unleash up to £50 billion ($64.5 billion) of funding if other pension funds followed suit.
As part of the compact, firms including Aviva (AIVAF), Legal & General (LGGNY) and Mercer have committed to allocate at least 5% of assets in their default funds to unlisted companies by 2030. All UK workplace pension plans offer default funds, which savers who don’t choose their own investment strategy are automatically enrolled into.
“British pensioners should benefit from British business success,” Hunt said ahead of his annual Mansion House Speech about the state of the UK economy, delivered in front of hundreds of top executives in London.
“Unlocking investment” could increase the typical retirement income by over £1,000 a year ($1,300) and direct more funds toward “our most promising companies, driving growth in the UK,” he added.
Measures to tap pension fund cash come at a crucial time for an economy suffering from stubbornly high inflation, depressed investment and feeble growth. The government is also under pressure to deliver post-Brexit benefits for London, the center of Britain’s hugely important financial services sector.
In addition to the pensions deal, Hunt announced draft legislation that will make it easier for firms to list in London and unveiled plans to roll back almost 100 pieces of “unnecessary retained” European Union law.
“I want the world’s fastest-growing companies to grow and list right here, making [the London Stock Exchange] not just Europe’s Nasdaq but much more… we want it to be the global capital for capital,” Hunt said in his speech.
Since Britain left the EU, London has lost jobs and assets to capitals in the bloc, including Frankfurt and Paris, as well as to other financial centers such as New York.
In recent months, several London-listed companies have also considered moving their listings to the United States or dual-listing their shares. The decision in March by chipmaker ARM, the crown jewel of the UK tech sector, to hold its IPO on Wall Street was a particularly painful blow.
By channeling more UK retirement savings — collectively worth some £2.5 trillion ($3.2 trillion) — into high-growth companies, Hunt’s “Mansion House Reforms” hope to make the United Kingdom the place to be for businesses wanting to grow and raise capital.
They build on the “Edinburgh Reforms” unveiled in December, which amount to the most significant overhaul of Britain’s financial services policy in two decades.
The Mansion House reforms and pensions deal “mark a historic turning point that will accomplish the dual aim of securing a brighter future for retirees and channeling billions into our economy,” said Nicholas Lyons, head of the City of London Corporation, which governs and promotes the City of London, the UK capital’s historic financial district.
The compact will “support firms to grow, stay and list in the UK,” he added.
London Stock Exchange CEO Julia Hoggett said the reforms would “go a long way” to ensuring UK capital markets can “fund companies and institutions that drive innovation.”
Unlocking pensions
Britain has the second largest pensions market in the world after the United States, but UK pension funds have much less exposure to equities than their international counterparts.
Over the past 25 years, largely as a result of regulatory and accounting changes, UK pension funds have slashed their exposure to equities from 73% to just 27% and quadrupled their allocation to bonds, according to think tank New Financial.
UK pension funds’ exposure to domestic stock markets has fallen even more sharply: from 53% in 1997 to 6% in 2021.
New Financial also estimates that just 11% of UK pension assets are invested in alternative asset classes, such as hedge funds, private equity and infrastructure, compared with a global average of 19%. That has weighed on returns, which are “firmly in the bottom half of the pack” globally, the think tank said in a recent report.
Other new reforms aimed at spurring investment into UK businesses include a program to consolidate pension funds, with the rationale that larger funds have the scale to invest in a broader range of assets and deliver better returns for savers.
Hunt also announced plans to consult on doubling investments by local government pension funds in private equity to 10% of assets, which he said could unlock £25 billion ($32.3 billion) by 2030.
In another step to boost the country’s appeal, he said the UK plans to create the first global “intermittent trading venue,” which will enable private companies to access public markets without a full listing.
The government’s latest plans will fast-track changes already underway in the pensions industry, said Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, which speaks for most large pension funds.
The combination of measures is likely to have “far-reaching” effects on the types of assets pension funds invest in, easing companies’ access to the capital they need to grow, he added.
