Michael Moore’s Outlook on pensions and productivity
Ritual and reform. The UK is world class at the first of those, not always so hot on the second. But occasionally they juxtapose and are all the more powerful for that. We may just have experienced the phenomenon at this year’s ‘Mansion House Speech’ by the Chancellor of the Exchequer.
In the City of London’s hierarchy of rituals, the ‘Speech’ has few competitors. Down the ages it has been given by countless Chancellors in the presence of an annual succession of Lord Mayors of London, the Bank of England Governor of the day and an audience drawn from banking, financial services and professional services.
Gordon Brown memorably upset established ritual in 1997 by turning up in a business suit rather than ‘black tie’ (itself only introduced as a relaxation from ‘white tie’ the previous year). A quarter century on, the entire room of 350 or so has long since succumbed to the change. Perhaps the next Chancellor will move things on and drop ties altogether. But I digress.
Reforms to the Bank of England, most significantly its operational independence for interest rate setting, had been announced ahead of the speech that June. But the reforming zeal was still alive during his remarks, as he set out (the first version of) his ‘golden rules’ for fiscal stability alongside monetary stability. All in the name of sustainable growth after a period of inflation.
History will be the judge of the significance of Jeremy Hunt’s speech a few weeks ago. Some might not put it alongside Mr Brown’s in the reform league table, but it was of huge (potential) importance for the private capital industry. And the historical echo of seeking sustainable growth after a period of inflation added extra resonance.
The key to Mr Hunt’s speech was securing better returns for future pensioners and new sources of capital for UK-focused investment. He rightly identified that present day pension investors are not on track for the kind of retirement they aspire to. And alongside that home truth, he recognised the persistent concerns about securing capital for Britain’s most productive businesses; be they venture-backed start ups, scale ups or mature firms needing re-wired by private equity to make them globally competitive.
Modern defined contribution pension schemes in the UK have been focused on minimising costs and risk. The amounts allocated to private capital have been underwhelming as a result, not least in comparison with international practice. So, the headlines after the speech were rightly focused on the voluntary commitment by nine of the largest UK-based institutions to allocate 5% of assets in default funds to unlisted securities by 2030. This is a big, public commitment and very welcome.
Having said that, it is still some way short of the 10-30% allocation seen in many international pension funds. And by way of further comparison, of the £70bn raised in the UK by BVCA members in 2022, approximately £10bn was sourced from US pension funds. Or about the same as the total raised from all UK sources. This is a gap that needs some attention.
Reforming the status quo in the pensions market has been a long term objective of the industry, even if fixing all the market and cultural issues will depend on more than these new initiatives. But the package announced by Mr Hunt has ambition and the right targets in its sights. Besides the ‘Compact’ signed by the major institutions, there is a new value for money framework which seeks to shift the mindset of allocators, a plan to consolidate pension schemes which should add scale to the process, and there is intent for the Local Government Pension Schemes to lead the way in this new era.
And let’s not forget the £250m taxpayer funding for private capital-backed scale-up businesses in life sciences, deep tech, fintech, climate tech and much else. That the oft-mentioned ‘LIFTS’ programme (‘Long-term Investment For Technology and Science’) raised barely a flicker in the post speech analysis suggests the City is now confident it will happen. Fingers have been duly un-crossed.
In 1997 Mr Brown’s speech at the Mansion House was part of a wider conflagration – deliberately setting alight sheafs of out-moded regulation and legislation. This time around, there were fewer pyrotechnics from Mr Hunt, but the slow burn may prove no less effective in creating genuine reform which has broad-based political and financial sector support. In the world of private capital we certainly hope so.
Michael Moore
Chief Executive, BVCA
This article was originally published on 15 August 2023 on the Private Equity News website here.
