In his annual Mansion House speech, delivered last night to City executives, Chancellor Jeremy Hunt turned his focus towards the UK’s largest pension funds in his latest attempt to boost the flatlining UK economy, and address the lack of inward investment into the UK’s growth industries.
As part of the “Mansion House reforms”, Hunt set out proposals to channel £50 billion from Britian’s direct contribution (DC) pension funds into high growth companies – such as life sciences and high technology. At the centre of this is a “compact” signed by the UK’s nine largest DC pensions providers, committing these fund managers to voluntarily invest 5% of their assets into unlisted equities by 2030.
As well as the compact agreement focusing specifically on direct contribution firms, the Chancellor also outlined a package of other policies for pensions, including exploring expanding the role of government in establishing investment vehicles; a consultation on doubling existing private equity investments in local government pension schemes; and a call for evidence on the role of Pension Protect Fund, amongst other measures.
Hunt also confirmed the Government would continue implementing a series of capital market reforms (many of which were already announced) that aim to make the UK a more attractive place for companies to list – aiming to reverse a steady decline in listing numbers in recent years. The most notable of these was the backing of new recommendations from Rachel Kent’s investment research review. The proposed changes would partly roll back the EU’s Mifid II rules, which barred stockbrokers from providing research for free by “bundling” it with share trading services for which clients pay a commission.
The flagship announcement on pensions has broadly been received well by the City and the sectors of the economy that stand to benefit from the investment (most notably tech and life sciences). This is seen by industry as a rather overdue set of reforms, bringing the UK more in line with economies like the US and Australia who have been able to generate much higher returns for consumers in their pensions schemes.
There remains skepticism as to whether a non-binding agreement will be strong enough to push direct contribution fund managers to meet the target and provide the investment the government is promising – the headline £50 billion figure will only be met if the entire DC sector follows the lead of the 9 signatories.
Either way, the UK’s science and technology sector will benefit hugely from the extra funds channeled into it through VC and private equity, even if the £50bn figure isn’t reached – an extra £2bn to the sector would still amount to twice the funding in the Government’s 10-year semiconductor strategy.
Not every measure announced by the Chancellor has been met with praise from affected stakeholders however – Quentin Marshall, chair of the Royal Borough of Kensington and Chelsea pension fund (the UK’s largest), being quoted this morning saying he “had not seen the evidence” to support the plan for the DB local government pension schemes that the Chancellor is proposing.
As he demonstrated in his March Budget with the removal of the pensions cap, Hunt clearly believe this is key to reinvigorating the UK economy, and again had no problem in announcing policies that have previously been trailed in a similar form by his Opposition number Rachel Reeves. Based on the similarities in the measures announced in last night’s speech and those trailed by Reeves at a speech in New York 6 weeks ago, it’s clear that both parties are in a very similar place on pensions and investment policy – which will be a welcome piece of continuity for the markets and industry.
Crucially however, the plan announced by the Chancellor last night does not include a requirement for the money to be invested in UK companies – firms would be free to find high-growth investments elsewhere if they so choose. It should be expected that Reeves and Labour would not be as open as the current Government on allowing fund managers to prioritise foreign firms to UK ones.
Overall, the reforms announced yesterday evening by the Chancellor were a common sense, in many ways overdue, set of policies that attempt to put keep the City, and the wider UK economy ahead of comparative rivals around the world. It makes London’s capital markets more able to invest in the high-growth industries that the Government is so keen to foster.
However, given the voluntary nature of the compact agreement, a robust implementation period and close monitoring of fund managers by the Treasury will be critical – the Chancellor may need to crack the whip harder on the City than his ideology would usually allow.