Ashok Gupta is Director of the New Capital Consensus project, a coalition of not-for-profit, apolitical organisations that have come together to explore how the current UK investment system contributes to the country’s current problems of low productivity, inequality and low levels of investment.
Ashok is also Chair of the Financial Systems Thinking Innovation Centre (Finstic), Chair of Mercer UK, and Chair of EV. He is a non-executive Director of Sun Life Financial Inc and of JP Morgan European Discovery Trust.
Its social duty is to channel money that ordinary UK citizens save in the form of pensions that provide for their retirement and improve the country they live in.
Pensions have historically been a means by which the collectivisation of risk and investment can provide benefits for all savers and capital can be recycled throughout the economy – providing benefits across society. Once a virtuous circle, the money provided to growth businesses gave savers good returns on their investments and a secure future throughout their retirement.
But the current UK investment system is broken.
UK pension funds aren’t contributing towards the development of the places to which pensioners retire. They are pooling in short-term, highly volatile secondary trading or being herded into offshore low-cost, highly concentrated passive investments. UK pension funds have slashed their domestic equity holdings from over 40% a quarter-century ago to a mere 4% today.
And if a Labour government does not address this, their missions for housing, energy, infrastructure and social cohesion will not be met – regardless of the fiscal tweaks made by the Chancellor in last week’s budget. So, quite simply, without change that will unlock domestic growth they are unlikely to win the next election.
New Capital Consensus, an apolitical, not-for-profit investment systems think-tank, released our report ‘Effective Investment’ this month in order to analyse the investment chain in the UK and help policymakers understand why UK savings, like pensions, are not currently invested in ways that drive UK economic growth.
The report found that the UK has plenty of investment capital – at around £5.5 trillion, it is the second highest in the OECD behind the USA. But because the system is risk-averse, short-termist and fragmented, it is routinely directed away from the innovative UK businesses that need it to grow.
Savers lose out twice – first, because they don’t get the quality of investment returns they deserve, and second because the places they live and services on which they rely are starved of cash.
We found that pension fund managers are ‘herded’ into offshore indexes like the MSCI Global Index, which allocates more of the UK’s £2.2 trillion of pension savings into Apple inc. than the whole of the UK economy on any given day. This has become a self-reinforcing spiral that is systematically dismantling Britain’s once burgeoning tech sector by transferring wealth to Silicon Valley. This allows heavily capitalised US tech firms to buy-up UK innovators – the reason why we haven’t seen a UK Google or Nvidia emerge.
If Labour is serious about supporting green energy and tech innovators with the capital they need to scale-up, they need to first look at the plumbing of the investment system.
But it is not only the tech sector that is crying out for the investment capital that is already there but ineffectively allocated.
The great battleground of the next election may be fought on the British high street – the regeneration of which relies heavily on injections of investment and the reassessment of risk across the economy.
At no point does civic pride evaporate more quickly than at the sight of dilapidated and decaying local high streets. But what if Labour was able to transform pensioners’ savings into the vehicle by which their local communities were regenerated? This would protect pensioners from the risks posed by an aging population and stagnant growth by collectivising risk across the sector and channellingeffective,primary investment capital into new projects on the high street.
The misallocation of capital is not inevitable, but merely a product of patchwork regulation, policy, lack of proper incentives to invest in the UK and a systemic approach.
Recently, both the Chancellor and Pensions Minister have begun to turn the tanker around with the Leeds Reforms and the Pension Schemes Bill, but there is further to go and a lot to lose through inaction.
The best way to support capital markets and investors to value risk-bearing capital would be to immediately launch a Risk Commission to report within a year on the changes to industry risk and liquidity management required to improve the effectiveness of the UK investment system whilst improving the returns to pensioners.
Other recommendations include producing UK indices to rival MSCI Global allocation and including greater UK-weightings in default funds. A UK Productivity Index, or Great British Index could be floated as a means of capturing passive investment for the UK economy.
We also urge the Government to adopt an ‘Effectivity Screen’ across key points in the investment chain, enabling the encouragement of productive behaviours within the system.
The investment system isn’t an afterthought or a nice-to-have. It is the bedrock upon which so many of the Government’s missions stand. And without repairing the link between savers and society, between pensioners and their high streets, and investment capital and the UK economy, no amount of prudential fiscal policy will be enough to win the next election.
