Often in politics, a bad idea turns up when its time has finally come. The current contender in the UK is the belief that a few tweaks to pension rules will flood dynamic companies with much-needed funds, save the troubled stock market, improve returns for future pensioners and resolve the longstanding weakness in business investment.
Chancellor Jeremy Hunt said in his March Budget that his plans, to be announced in the autumn, will “unlock productive investment from defined contribution pension funds and other sources, make the London Stock Exchange a more attractive place to list, and complete our response to the challenges created by the US Inflation Reduction Act”.
Not to be outdone, Rachel Reeves, the shadow chancellor, wants to consolidate UK pension funds and perhaps force them to invest in a future growth fund for fast-growing UK companies, because, she tweeted this week, it is well-established that a lack of access to capital is holding back British businesses. “Nothing is off the table,” she said.
In seeking evidential underpinning for these claims, the first place to start is the issue of whether UK companies are being constrained by a lack of finance. The beleaguered CBI has the best data on this, covering manufacturing, service and financial companies, with the manufacturing data stretching back to 1979. It is immediately obvious in this data that a lack of external finance is usually bottom of companies’ lists of impediments to investment. The same is true of other sectors.
There is a little more evidence that smaller companies with intangible capital face some financing constraints because they lack the collateral needed to secure loans. In response, entrepreneurs use their properties as housing equity. But Bank of England researchers found that a large 10 per cent rise in house prices could increase investment in these smaller companies by only £4.5bn. So there is no small company financing constraint which is material to the UK’s £2.5tn economy.
Complaints by Reeves and the Tony Blair Institute that Canadian and other international pension funds are investing in UK companies only serve to highlight that British firms can attract finance.
The second question is whether pension funds should be taking more risks. Defined benefit pension regulations since the 1990s might well have gone too far in preventing equity investment in preference for government bonds. But if you take this view, it is odd to believe that the best place for British workers to park their funds is UK equity assets.
Employees are already highly exposed to UK-specific risks and it would be bizarre for the government not to allow pension funds to look for the best returns around the world.
These problems are just warm-up acts. The core issue is that the lack of British business investment is rooted in UK companies not wanting to increase capital expenditure.
Auto manufacturers, such as Stellantis, complain that the regulatory landscape is not conducive to investment in Britain. Planning and permitting difficulties hinder the development of renewable energy with investment timelines stretching to 12 years for offshore wind, 10 years for onshore wind and four years for large solar projects to be implemented. Syndicated loans to smaller companies in the UK dropped after the 2016 Brexit referendum, specifically as a result of falling demand for finance.
Domestic and foreign companies just don’t think the UK is the best place to invest. That is why business investment has stalled.
We know and understand that politicians are too scared to say the words “planning” and “Brexit” ahead of an election. But if our leaders don’t focus on the real problems, they won’t succeed in office. And Britain’s investment failure will only continue.