ALEX BRUMMER: British pension funds are a slob when it comes to asset management
Looking ahead: Chancellor Rachel Reeves
Rachel Reeves can’t be too happy about the hostility towards her joyless Budget. This week, she will try to rebalance the story when she appears before City Grandees at the Mansion House.
Unlike one of her illustrious predecessors Gordon Brown, the first female chancellor will be spared the struggle with the dilemma of wearing an elite white tie.
Traditionally, the Mansion House was used by chancellors to make major monetary announcements. Granting independence to the Bank of England in 1997 changed that.
And as much as there are arguments for reforming the Bank, where Reeves worked for six years, that does not seem to be high on her agenda. The former junior official, who worked on the international portion of the inflation report, appears to have a thoughtful working relationship with Governor Andrew Bailey.
The theme on Thursday evening is growth. The foundations have apparently been secured; the bond markets may disagree, but the Chancellor is going further.
There’s no secret behind Reeves’ growth recipe. Housing and infrastructure; boosting private investment so it can sit alongside the government in Labour’s National Wealth Fund, and reforming Britain’s moribund £3 trillion pension sector. Rather than being an engine of growth, as in Canada, Australia and elsewhere, UK pension funds are a blob of asset management.
The removal of tax incentives to invest in companies, the intrusive regulations of the post-Maxwell era and the extreme caution that favored investments in bonds (gilts) over shares have put serious pressure on the venture.
Jeremy Hunt started the process of untying the knots, but not much has been achieved. Reeves may have ambitions to turn things around, but is still waiting for the outcome of the Pensions Review, delivered by Emma Reynolds. Her big idea, based on France’s ‘Tibi’ – which has provided around £15bn of capital to growth companies – has been shelved.
There are several huge obstacles the government must overcome if its ambition is to boost investment in London Stock Exchange listings, start-ups, AI and other alternatives. Britain lacks the big pension behemoths such as ‘Aussie Super’ and the Canadian public sector funds. They have encouraged citizen capitalism in both countries and made an impact in Britain.
There are simply too many small, independently managed funds in Britain and attempts to create a behemoth from local government funds are facing legal hurdles. Moreover, UK funds have lost their appetite for UK shares, and building from the current low of 3 per cent will take decades of work.
Progress has been made to make London an easier place for asset managers to invest. A relaxation of regulations surrounding IPOs and an ‘interim market’ intended to help growth companies should improve the situation. The IPO pipeline is strengthening, with French media group Canal Plus, Shein and perhaps Waterstones among those gearing up for London floats.
The undervaluation of shares in London has failed to turn it into a vibrant market. Understanding the causes of the valuation gap will be a key to unlocking value. Activist investors such as Elliott, Nelson Peltz at Trian and Sweden’s Cevian – which runs a £15 billion European long fund – are helping. The biggest obstacle is complacency.
BlackRock is often the largest presence on many stock registries, but rarely forces real change. The greatest enemy of growth is inaction. If Reeves finds a way to overcome that barrier, momentum can become a reality.
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