What must the new government do to revive financial markets and growth? Harnessing the power of UK fund flows into pensions and Isas would be an excellent start.
New chancellor Rachel Reeves has rightly expressed a desire to utilise the power of pension assets to boost domestic growth.
It has long been clear the fiscal constraints resulting from Covid and energy support schemes have reduced government finances available for much-needed infrastructure and sustainable growth investing.
Meanwhile, there are hundreds of billions of pounds languishing in unproductive assets in UK pension schemes and tens of billions of pounds a year being contributed to both defined benefit and defined contribution schemes, most of which are benefiting overseas markets more than our own.
Significant amounts of tax and National Insurance reliefs are paid into pensions – £70bn a year – so there is a clear national interest in how this money is invested
The new government has already promised to review pensions and has rightly recognised the tremendous opportunity to use these domestic asset pools more productively. After all, significant amounts of tax and National Insurance reliefs are paid into pensions – £70bn a year – so there is a clear national interest in how this money is invested.
Sadly, pension funds have consistently cut exposure to the UK in recent years, weakening our economy and financial markets.
The pension selling pressure created a vicious circle, with market weakness deterring foreign investors and domestic funds then cutting further as the UK kept underperforming.
The new government can seize the opportunity to rebuild support for our own markets, bringing more long-term capital into growth-boosting and potential return-enhancing opportunities in the UK.
Rebuilding UK pension flows into domestic growth assets could kick-start a virtuous circle, after years of disinvestment, de-rating and inadequate growth
Most major economies have fiscal constraints, so global competition to attract institutional capital and foreign direct investment has risen. Rebuilding UK pension flows into domestic growth assets could kick-start a virtuous circle, after years of disinvestment, de-rating and inadequate growth.
So, what should policymakers be considering?
Firstly, remove barriers deterring domestic, relative to foreign, investment. An obvious one is removing stamp duty. Other countries do not impose such costs on their share transactions.
Secondly, reconsider the UK regulatory over-emphasis on risk minimisation. Protections designed to benefit consumers are actually imposing significant costs, in the form of lower returns, less diversification of asset classes and restrictions to capturing different types of risk premia.
Disproportionate emphasis on lowest cost drives pension funds away from active management in assets such as real estate, infrastructure, alternative energy and venture capital specifically. Diversification across geographies is an inadequate substitute for asset class diversification.
The government has a responsibility and a right to require a minimum amount of new contributions to be invested in UK assets – perhaps 25% or even more
Consumer Duty diktats need careful review, including the impact of tougher financial advice rules (even for non-advised customers!), daily pricing, liquidity requirements and shorter transfer times, as the benefits of investing in less liquid, growth-boosting or sustainable assets is conflicting with daily pricing, speedier transfers and cost controls. Greater use of performance fees could help.
The ludicrous and misleading cost disclosures imposed on investment trusts – which are an ideal mechanism for long-term investment in illiquid assets – have caused losses to both retail and institutional investors, while destabilising a fund sector that could do so much more to boost returns and growth.
While removing barriers would be a good start, introducing new incentives is also important.
Channeling UK retirement savings into domestic growth makes economic and social sense, helping ensure pensioners retire into a better country.
Recent initiatives, such as requiring funds to disclose how much they invested domestically by 2027 and voluntary Mansion House commitments to early-stage capital (none of which must be in the UK) are far too weak. Much bolder measures are overdue.
I’m in favour of merging cash, stocks & shares and innovative finance Isas into one annual allowance of, say, £25,000, of which a minimum percentage should be invested in UK assets
With public money so scarce and generous taxpayer contributions into pensions, the government has a responsibility and a right to require a minimum amount of new contributions to be invested in UK assets – perhaps 25% or even more. Assess the economic value of such enormous spending.
The same applies to Isas. I am in favour of merging cash, stocks and shares and innovative finance Isas into one annual allowance of, say, £25,000, of which a minimum percentage should be invested in UK assets. This would simplify the system, while also boosting domestic markets.
Finally, it is time for the government to work with investment companies to develop long-term investment funds that support UK growth, including infrastructure, early-stage businesses, promising small or medium companies, social housing and sustainable energy projects.
National infrastructure funds, which can be transferred in specie and must be held for a minimum period, such as five or 10 years, could combine a range of projects across several types of assets.
These would be available for pensions and Isas, qualifying for tax-relieved investment vehicles.
Ros Altmann is a former pensions minister
More s__t!!
I wrote earlier today about the risk concentrations under this UK first charade… when really it is no more than using hapless OPM to shore up Govt. Gilts..
The tax relief is a choice arising from original DB vs State Secondary pensions… + the employer NI reliefs… Quite why this is mixed up with a national duty to commit to the ’cause’is true obfuscation of reality… there was also the the S.33/4 self employment deal.
Without the contributory tax relief – I believe a sole and level amount for all best – who is going to save for 30+ years just to see 75% of it subject to income tax? The deal between ISAs and DC pensions is pretty close in some circumstances anyway…
The evidential facts of the UK as an investment market,though the overall economy is better, has led to the LSE being a lauging stock – no pun – real peoples’ money is now much more sophisticated and wary of expensive all in one fund managers…
Before this headlong rush to prop up the failing, why not take a moment to ask why is this? The Govt. has NO right to make people invest where they think fit – will RA write the performance guarantees to support her wierd views? No? Then, personally, I will stick with positions where I can hedge against the worst!
Errm… anyone aware that taxation is very high, CGT is going to be increased, withdrawal of non dom funds, UK emploers to be saddled with more red tape and labour considerations,… all reasons not to invest!
A good start would be to stop paying interest to banks on the QE monies they were given in the first place – ahem.. £33Bn a year!
1. “Meanwhile, there are hundreds of billions of pounds languishing in unproductive assets in UK pension schemes” Really? And what hard evidence do you have for that?
2. “After all, significant amounts of tax and National Insurance reliefs are paid into pensions – £70bn a year – so there is a clear national interest in how this money is invested.” What?! That’s taxpayers – that is workers and owners of wealth creating private business getting their own money back. It is not ‘national’ money at all.
3. Yes. Scrap stamp duty.
4. “With public money so scarce and generous taxpayer contributions into pensions, the government has a responsibility and a right to require a minimum amount of new contributions to be invested in UK assets – perhaps 25% or even more. Assess the economic value of such enormous spending.” Total economic fallacy.
And so on.
A much simpler and guaranteed to work idea is to massive decrease taxation and interventionism so making UK investment more likely to make a return and let professional asset allocators (that is NOT politicians and bureaucrats) get on with it.
And you have precisely zilch about the biggest elephant in the room – bad money.
Oh, and scrap all the net zero and wokey stuff.
Marks out of ten? 3.
She refers to the barrier caused by Stamp Duty, but overlooks the advantage that UK assets have in terms of no FX risk.
A second point is that if they scrap Stamp Duty, how will they make up that lost revenue.
Finally, and most importantly, this is someone else’s money that she wants to re direct.
As if from on high…..
D Telegraph today – deep breath as I can hardly believe this – HS2 Chairman wants HS2 passengers NOT to travel by train… + other completely wrong figures and costs – no surprises there!!
How is a train which requires a change in the middle of relatively nowhere, going to be faster than a direct one (to Euston with all the infrastructure there already) – + the inconvenience??
Ros A. seems to be in a distorted elysium world of public projects being carried to plan, sic and budget – sad to see really – like Ed Millinad will solve to world’s energy/CO2 issues… Aha! Now I know…latter has been throwing his disco biscuits around again!
:-O
BTW… does anyone know how much the HS2 tickets will actually coat? Presumably, there must have been some forecast in the Business Plans – Oh, no plans, well, that’s all right then…
BTWx2… The Man in charge of HS1 – London to C. Tunnel – delivered on time and within budget, was asked to comment on the fiasco of HS2…
He said I wrote to HS2 and Govt. pointing out why it would fail all targets – true – but, even though I made a success of HS1 no one asked me at any time to assist with HS2!!
Is this the Govt. right Ros A. was talking about?