A little dry

In the mid-1980s, The New Republic, an American magazine of politics and culture, hosted a readers’ competition: Could anyone nominate a more boring headline than that which had recently been published in the New York Times: “Worthwhile Canadian Initiative”? No one could.

Similarly, the publication of the government’s new local government pension scheme consultation might seem to be of interest only to the incurably geeky or as an aid to the hopelessly sleep-deprived. This stance is understandable but in error: because buried in the consultation launched this month are proposals that make for bold, election-ready messaging, even if their practical merits are far more dubious.

The government’s consultation proposes passing new rules to severely constrain the discretion of local council pension funds, like the one I chair in Barnet. First, more of our investments would be ‘pooled’ into ‘Collective Investment Vehicles (CIVs)’, which would be valued at at least £50bn, rivalling the large and influential Canadian and Australian government pension schemes. Secondly, funds would be required to invest up to 5 per cent of their assets to support levelling up in the UK. Finally, along with some less significant technical changes, the consultation outlines an ambition for 10 per cent of our investment allocations to be made to private equity.

The problem? It seems unlikely that these measures will have any practical effect beyond providing ammunition for political slogans at the next election. Worse, without more thought, they risk being actively harmful to those who rely on local services who would ultimately have to fund any shortfall in retirement income for the pension fund.

Let’s start with the idea likely to get the widest support within the local government pensions community: greater pooling is a divisive topic, but seen as desirable by most and inevitable by practically all. However, further progress on fees, fund choices and investment performance is needed to make pooling live up to its promise, made more pointed by shrinking from the current eight regional pools to five ‘super-pools’ as the smaller pools unable to meet the minimum £50bn size requirement are swallowed up. Canadian pension funds get access to top quartile fund managers, often at bottom-quartile fees. The challenge for the new UK pools will be to do the same.

The two less attractive government suggestions are the more specific constraints around levelling up and private equity, despite, or because of, their ambition. The problem is not their end goal, but that the proposed means are unlikely to achieve them, while creating new problems to solve.

Bemoaning a lack of investment in the UK from capital allocators is not new. For nearly 20 years, from the early 80s to the late 90s, UK pension funds accounted for over a quarter of the total market value of UK-listed shares. However, this declined to under 13 per cent at the time of the financial crisis to under 3 per cent now. A lack of investment into UK plc meant flat productivity and wages for British workers, and an economy where a third of Brits have either no savings or under £1000 in a savings account. This lack of savings meant less money in banks or pensions which could flow into greater investment back in the UK. And so the doom loop fed upon itself.

Reversing this vicious cycle into a virtuous circle might seem a master key to unleashing our island’s entrepreneurial spirit. Indeed, it is. The problem is that Jeremy Hunt, while identifying the problem, has misunderstood correlation for causation in proposing a solution.

The issue is not that the UK’s pension wealth does not want to invest in amazing British companies. It is that Britain has become a global centre for allocating capital rather than creating the brilliant companies fighting to receive a share of the bounty. If a myriad of brilliant, cheap, innovative British companies were open to investment, pension funds would be queuing to participate financially in funding their growth. Being forced to invest in less profitable opportunities is less likely to grow new businesses in the UK’s left-behind communities than generate lower returns, leaving local council taxpayers to make up the difference to fund local government pension schemes.

So much for pension funds unleashing billions to solve the levelling up policy challenge. What about the promise of private equity to create a pipeline of new British companies to build the next Google here in the UK?

The era of cheap money, thanks to quantitative easing and low interest rates, gave governments a golden window to invest in a potential pipeline of new business creation. Beyond growing London’s fintech sector, however, too much venture capital money chased either dubious business-model-led ‘innovation’ (another scooter startup with the promise of eventual local monopolies and higher prices!) or subsidised consumers favouring a more convenient delivery of a traditional service. Rather than buying pasta in the supermarket, you could get it delivered to your door… on subscription!

The consultation does not, in fact, restrict proposed private equity investment requirements to funds that invest solely in the UK. This likely represents a tacit acknowledgement of the fact that capital follows production, not the other way around. Again, the problem is not that great companies are struggling to acquire funding, but a lack of great companies. The hard work of tech transfer rules, subsidising higher infrastructure and prototyping costs for building hardware, and changing government procurement rules—all vital for helping climate tech, for example, to go from aspiration to reality—deserves more attention than strong-arming public pension funds to throw money at a problem that they alone cannot solve.

The government is right to envy Canadian pension funds: their size helps make them desirable partners for the best venture capital managers and institutional investors. They, in turn, benefit from both access to these top managers and discounts on fees. Pools, given a wide enough range of products and effective use of their scale, could well deliver similar advantages.

But just as the Government is correct to identify this particular worthwhile Canadian initiative to copy, perhaps it might too embrace the wider lesson of worthwhile Canadian initiatives: the hard, unflashy work of diagnosing problems and putting in place several detailed steps to try and start to solve them. When it comes to government policy pronouncements, rather than the headlines that report them, boring can be a virtue.

Image credit: Number 10, CC BY 2.0 via Wikimedia Commons