The drive to invest in the UK

The term ‘productive finance’ became common parlance across the industry several years ago, as efforts were made to consider the role of long-term assets in driving growth for sectors of the economy needing capital. 

Indeed, several initiatives have been launched in the wake of that initial work, including the Long Term Asset Fund, the Long-Term Investment for Technology and Science (Lifts) scheme and perhaps more publicly, the Mansion House compact, which includes a voluntary commitment for pension providers to invest 5 per cent of their default funds into unlisted equities by 2030.

These initiatives are all focused on specific sectors, such as technology and life science, and generally through encouraging investment in unlisted equities, or at least what we might term as illiquid assets.

The emphasis of the Spring Budget was different, in that it was far less narrowly defined, instead announcing measures to encourage UK equity investment more generally. 

The premise for this rallying call is that the level of investment by pension schemes in the UK stock market has dropped over the years, and that it is low compared with international counterparts, and how much they allocate to their domestic markets. 

Some commentators quote figures below 10 per cent, as to the amount invested by UK pension schemes in UK equities.

In practice, this is more a function of including defined benefit schemes, where the driver is one of de-risking to match liabilities, as opposed to a fundamental desire to invest elsewhere in the world. 

We need to be realistic on this point. I can’t see a group of trustees, whose scheme is at or close to buyout levels of funding, suddenly taking on higher volatility assets. That would appear to run contrary to their fiduciary duty, putting promised pensions at risk.

You could make a different argument for a scheme that still has a large funding gap, but it would be a very crude approach to simply seek to remedy that through increasing UK equity investment.

The drive to increase investment in our economy is one that few people would argue with.

Defined contribution workplace schemes are in a somewhat different place when it comes to UK investment. While there are different weightings, it’s not unusual for default funds to have 25 per cent or more invested in the UK stock market, and more when you add UK bonds, and in some cases property exposure.

Fund managers will debate whether the UK market holds most promise for returns going forward, compared with overseas markets. It’s certainly been a mixed picture over the past decade, but we should always keep in mind that 'past performance is not necessarily a guide to future performance', of course.

Australia is widely regarded as a good example of a mature retirement savings market, and it does have higher levels of domestic investment within its ‘Super’ schemes, including both listed and unlisted assets.

But the maturity of the market is important here. Australia has mandatory employer contribution rates of 11 per cent, rising steadily to 12 per cent by 2025.

This compares with 3 per cent employer contribution rates in the UK, or 8 per cent in total, and of a band of earnings, meaning actual percentages are considerably below this for those on low earnings.

And while auto-enrolment has pushed up participation rates considerably, it’s not a mandatory savings system for employees.

Australia was once reliant on imported capital to fund many of its major domestic development projects, but is now somewhat awash with investment capital, partly thanks to the very high proportion of retirement assets it now enjoys.

It is less to do with a push on domestic investment, rather, the sheer weight of long-term savings now available.

Here, the proposal is that pension schemes will have to start disclosing the level of UK investment from 2027, with details to be consulted upon in the coming months.

While this will undoubtedly involve some change, there is already a considerable amount of disclosure as a function of a competitive market.

Various reports are produced annually, which set out how schemes are investing their default funds, and indeed relative performance between providers.

The government is effectively formalising this as a regulatory requirement, and this will no doubt ensure such reports are further reaching in future, including a wider range of providers.

The chancellor also announced the launch of British Savings Bonds, and a new variation within the Isa regime; the British Isa. This latter option creates an additional £5,000 allowance for investment in the UK, the details of which have still to be confirmed. 

The new Isa is quite a different proposition from what has been announced on pensions.

While perhaps tasked with the same challenge – investing in the UK – the Isa offers the incentive of an increased tax-free allowance, albeit relatively small. But the real difference is likely to be the savers to whom it applies.

While some people are wealthy enough to fully utilise their annual £20,000 Isa allowance, and this will extend that, the vast majority of people either can’t afford to save into an Isa, or can’t afford to use the full allowance. For them, it is less clear what the benefit will be, or indeed whether it will create any additional investment.

The extent to which these measures will move the dial has yet to be seen, but the drive to increase investment in our economy is one that few people would argue with, and it’s right that we open this debate.

Jamie Jenkins is director of policy and communications at Royal London