The problems with Britain’s investment landscape are well understood. On the one hand, there are multitrillion-pound pools of UK capital that over time have been withdrawn from the long-term, productive investments that foster growth.
On the other hand are the savers – the people who own this money and whose retirements often depend on it – who are failing to benefit from potentially stellar returns that the UK’s homegrown, world-beating science and tech innovations can bring.
This in essence was the conundrum outlined by the Chancellor at the Mansion House. And his speech – laying out a wide and detailed array of policy measures – is an appropriately ambitious plan to address it.
There is no silver bullet. In recent months a plethora of voices from the City, business and politics have chimed in with their views on what needs fixing, and what those potential fixes might be. The various parties naturally nurture their own interests.
But what led up to this speech – and what perhaps makes this an extremely promising moment for investors and the UK economy at large – was a high degree of consensus on what to do across so many groups, including across the political spectrum.
Getting to the detail, the Chancellor set out plans to reform the different pillars of UK capital. It is right that these are treated differently.
His proposals seek to consolidate the pools of pension money sitting variously in local government schemes and private schemes, of both the defined benefit and defined contribution types.
Consolidation should give access to a wider range of assets and in turn – crucially – higher returns.
While straightforward performance comparisons are tricky, a body of data suggests UK pension returns lag those in other countries: the lack of exposure to growth assets, including unlisted or private market investments, being the likeliest cause.
For pension capital overall, future growth will lie with defined contribution (DC) schemes – or more accurately, tax efficient long-term saving schemes – on which a growing proportion of the UK depends.
This is where it’s most vital to develop the skills and culture that will benefit savers today and in future.
It is unfortunate that in recent decades, at the same time as the paternalistic model of defined benefit pensions has been replaced with DC schemes and an emphasis on self-provision, individuals have become increasingly removed from regulated growth markets.
Many UK savers have chosen instead to invest in buy-to-let properties, with the idea that “my buy-to-lets are my pension”. More recently, particularly since the pandemic, money has been put into a range of cryptocurrencies: the Financial Conduct Authority says 9pc of adults now own these.
By contrast there seems to be limited public understanding of what happens in the UK’s capital markets or indeed why they exist. That must change.
We must find tangible ways of rebuilding the public’s interest in investment. The connections between capital and the technology we use each day – from our cars and phones to our energy sources and vital healthcare – need to become more apparent.
Is my pension a part of that invention, that solution, that success?
While individuals have become increasingly estranged from the workings of our markets, trustees and other guardians of assets have also become more cautious – their attention moving away from the primary goal of delivering the best possible returns.
Other financial centres around the globe where the focus is on returns and better pension payouts for retirees are ahead of the UK, their pension systems having undergone greater consolidation.
Again, no single silver bullet will serve. These cultural and structural shifts are intertwined with another problem the Chancellor raised in his speech: the shrinkage of London’s stock market.
Since 1996 the number of companies on London’s main exchange has collapsed 60pc from over 2,700 to 1,100. Declines have occurred too in European and US exchanges, but not with the same severity.
London’s standards of governance – increasingly out of kilter with those overseas (where, ironically, a growing portion of UK savers’ own capital has been invested) – are part of the explanation.
The governance burdens deter new companies from joining the stock market and are a factor behind many other companies’ decisions to leave.
The UK remains one of the most innovative countries in the world, punching way beyond its weight in many sectors. This drives world-class development in life sciences, environmental technologies and much else – but too many of them are financed with US capital, making US markets the easy destination. With more UK capital, the UK markets become a natural home for our growing companies.
Action is being taken on a number of fronts to level the playing field, including the FCA’s proposed changes to listing rules. But the dwindling universe of quoted investments poses more immediate problems for savers: how are they to benefit from the growth and enterprise that’s taking place elsewhere?
Asking trustees to invest a certain proportion in defined asset types may draw hostile headlines, but this isn’t compulsion. Nor is it an onerous ask, but rather an obvious one if we are to give savers access to the best opportunities.
And if savers’ interests are genuinely paramount, in the form of putting long-term returns first, the targets may well drift into irrelevance.
The Chancellor’s speech was ambitious and broad. Hunt highlighted many of the issues raised by the Capital Markets Industry Taskforce. When our members gathered last week, we identified many of the same remedies.
What’s needed now is to maintain the momentum of reform. The detailed policy shifts that taken altogether would change the bigger picture won’t be in everyone’s favour – at least not in the short term.
But over time they will build an ecosystem where savers’ capital becomes better connected with productive, growth-supporting ventures. Savers will benefit, and so will wider society. There seems right now an extraordinary clarity about that outcome as a goal held in common.
This article first appeared in the Sunday Telegraph, 16 July 2023. It was jointly authored by Peter Harrison and Sir Jonathan Symonds, Chairman of GSK. Both are members of the UK Capital Markets Industry Taskforce.