Coverage of the Government’s ‘productive finance’ agenda, heralded at the 2023 Mansion House speech, has naturally focused on the reforms proposed to pension schemes: beefing up UK pension schemes to allow a smaller number of bigger schemes to deploy economies of scale, thereby increasing flows of investment into UK companies.
But the supply side of the Government’s programme is equally interesting. What has emerged in recent years, in fits and starts, is a constellation of ‘productive finance’ Institutions, such as the UK Infrastructure Bank, the British Business Bank and the Long-Term Investment for Technology Science initiative (LIFTS). The UK state increasingly resembles in content – if perhaps not yet in substance – the post-war modernisation states of Western Europe rather than the small-state vision more closely associated with the original Brexit vision.
After the devastation of the Second World War, the centre-right parties governing in most European countries followed a common template to rebuild their economies. They set up state investment banks to direct investments into promising sectors and they forced consolidation on small scale national players so they would be more competitive on export markets. They also provided detailed regularly updated guidance on future scheduled public investment in infrastructure to ‘crowd in’ private sector investors.
A paradox of Brexit is that the UK state is modernising in ways that make it look far more like other European states. Countries such as France, Germany and Italy continue to deploy the kind of tools which the UK is now developing – although often on a more substantial scale, since the institutions are far more embedded in the state structure and have acquired significant resources over time.
Inside the EU’s single market, the UK specialised as a more liberal market, which attracted investment capital that originated in other, more statist member states. International financial centres compete on scale and the City of London benefited from a European ‘Hinterland.’ But Brexit has reduced those flows into the City. The UK, therefore, needs to build up other specialisms whilst also defending its position as a global financial centre. In order to achieve this, new domestic capital investment is needed. This is what encourages the British Government to adopt the interventionist tools mentioned above.
The UK occupational pensions system is large in absolute terms, but has, historically, long been a cottage industry – one defined by fragmentation. Now, the Government wants to consolidate the market into a handful of players. This should benefit pension savers, but the Government also has its eye on another prize: larger pools of capital with the scale that makes investing significant sums across a wider range of UK projects a natural consequence of prudent asset allocation. The hope is for a win-win for investees and also for savers.
Encouraging consolidation of occupational pension providers is good international practice. But is encouragement enough? To deliver the win-win situation on any reasonable timescale likely demands bolder action. The Government’s own analysis shows that, to deliver good returns to pension funds, the cost of investment must come down sharply. The most feasible way to achieve this is – again – through economies of scale. To complete its reform, the government should therefore ask workplace pension schemes to set up a collective investment vehicle to invest in private markets. It would have the scale to negotiate lower fees with existing private equity providers or conduct the investment programme itself in conjunction with the state development banks which have already been set up.
In Australia, the industry pension schemes created a collective vehicle – IFM Investors – to invest on their joint behalf in infrastructure and more recently in private equity. It is now one of the world’s largest infrastructure investors. With Australia increasingly seen as a pension model for the UK to follow, this is perhaps the cardinal lesson: pension funds, by pooling their resources together, can make the ambition of the Mansion House speech a reality.
Gregg McClymont is the Executive Director of Public Affairs, Policy & Strategy at IFM Investors and Former Shadow Pensions Minister.
Views expressed in this article are those of the author, and not necessarily those of Bright Blue.
