Consolidation of Consolidations

In the aftermath of the 2008 financial crisis, the UK government’s regulatory focus has heavily emphasized risk management, with critics, including the Labour Chancellor, arguing that this approach has excessively hampered growth in the financial sector. This sector is crucial for the UK economy, contributing to 10% of tax receipts and employing 1.1 million individuals. Recent intentions to reform financial regulations and reduce red tape signal a shift toward fostering growth. These changes are especially relevant for City regulations, which have been seen as overly restrictive. The government’s new commitment to bolstering the economy through regulation, particularly in the finance and pension sectors, is a welcome move amidst broader governmental policy challenges.

A significant reform initiative involves consolidating the UK’s numerous local government pension schemes—currently standing at 86 with a total asset value of £354 billion—into eight larger “mega-funds.” This strategic move is expected to benefit both British pensioners and the economy as a whole. Larger, pooled pension funds are likely to access a broader range of investment assets, reduce operational costs, and attract superior management talent. Additionally, these consolidated funds will have the capacity to invest more effectively in crucial infrastructure projects, an area where the UK has a notable deficit. In contrast, Canada’s extensive single fund for public pensions demonstrably invests significantly more in infrastructure than the UK’s current schemes, underlining the potential benefits of a streamlined approach to pension fund management.

The need for increased infrastructure investment in the UK is underscored by estimates from EY, which suggest the country will face a £1.6 trillion funding shortfall by 2040 unless private sector investment is doubled over the next fifteen years. Addressing this shortfall is imperative for achieving the UK’s social, energy, and defense goals, while also enhancing labor mobility and productivity. Recent loosening of fiscal rules should conventionally mean more taxpayer resources for infrastructure projects; however, it poses risks of overspending and inefficiencies. A stark example of potential waste is the collapse of the BritishVolt factory in Northumberland despite substantial government investments, emphasizing the need for private investment in a free-market context to bolster growth effectively.

While restructuring pension funds may not automatically lead to greater infrastructure investment, the ability to deliver ‘investable’ infrastructure is critical. Historical inefficiencies in timely and cost-effective delivery of infrastructure projects, like the HS2 rail line, have frequently resulted in budget overruns and project delays, illustrating a pressing need for reform in planning systems. It is crucial that government initiatives prioritize expedient and efficient project implementation to ensure investors can realize meaningful returns. Currently, Chancellor’s strategy prioritizes maximizing returns for pensioners without mandating domestic investment, a balance that many see as essential given concerns over the sustainability of the state pension.

Amidst these discussions, positioning British equities as an attractive investment option remains challenging. With a significant number of delistings and a stagnant London Stock Exchange, the UK’s pensions currently hold only 4.4% of their assets in domestic equities, significantly below the global average of 10.1%. To address this disparity, the government can eliminate self-imposed barriers, such as the 0.5% stamp duty on British equities, which stands in contrast to much lower costs for foreign investments. Further, a comprehensive review of the taxing and regulatory landscape could restore the attractiveness of UK markets for domestic and international investments alike, particularly in light of the recent budgetary measures which inadvertently raised costs for businesses.

Lastly, a cultural shift is necessary to mitigate the inherently risk-averse tendencies among UK investors. A prevailing focus on traditional sectors like oil and mining limits diversification into more promising sectors such as technology and life sciences. Since 1997, there has been a marked increase in the portion of Defined Benefit pension plans invested in lower-risk bonds, comprising the bulk of their asset portfolios, which restricts exposure to higher-return opportunities like venture capital. Consequently, nurturing a more risk-tolerant investment culture and promoting the growth of existing funds will be integral to encouraging larger-scale investments in high-yield sectors, thus revitalizing the UK economy and enhancing its resilience in the face of future challenges.