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The writer is an FT contributing editor
When the shortcomings of the UK pension system are dissected, attention is often drawn across the Atlantic to Canada and its giant pension funds that have become a force in international finance, particularly in their direct management of private assets.
Britain’s plan to boost investment in its economy and arrest the withdrawal of funds from domestic stocks rests meaningfully on consolidating pension funds so they look more Canadian. But would this solve the UK’s problems? Looking at the two countries, the read through from Canada to the UK is complicated.
Some of the problems of the two economies actually appear similar. GDP per hour worked in Britain has grown at a paltry 0.6 per cent a year since 2015, around half the US rate. Canada’s productivity growth rate has been almost identically dismal.
The expert consensus in both countries blames the lack of domestic investment for this problem. At the end of 2023, more than 70 British business leaders wrote an open letter to chancellor Jeremy Hunt complaining that pension funds were starving the UK of capital and called on him to do more to reverse the decline in domestic equity pension investment. Months later, 92 Canadian business leaders issued a similar missive to Canada’s finance minister.
This problem arises despite the fact both countries have vast quantities of funds sitting in their pension systems. Calls to increase domestic investment must be relative to opportunities available. And this where some of the differences lie between the countries.
While Britain has made its major airports, electricity grid, water and waste network available to private funds, chances for Canadian pension funds to invest in their own critical infrastructure have been scarce. Where opportunities to invest have arisen — for example, financing and building the Montreal metro system — pension funds have taken them. Canadian schemes can hardly be blamed for not trying. And capital has flowed to UK infrastructure regardless of its nationality.
That said, Britain’s ability to supply new investable projects to meet potential local demand is questionable. Earlier this year a report by the Purposeful Finance Commission, a forum of regional government figures, found such a dearth of local planning expertise that they recommended investors club together to fund additional planning officers to clear the backlog of applications. If newly consolidated UK pension funds attempt to allocate a slew of new money to UK infrastructure investment, they may struggle. British policymakers, like their Canadian counterparts, will need to focus on supply as much as demand, if they want to boost investment.
In the area of capital for growing companies, the issue is not so much supply in the UK. Britain does not suffer from an absence of high-quality early-stage firms. The country has become the largest European hub for venture capital and growth equity — raising more than the next two largest markets combined — even without domestic pension capital. The issue is more about lack of capital to support growth companies as they scale up. Consolidating schemes could open the door to higher allocations to risky venture capital investments that tend to have high long-term returns for both investors and the economy.
For UK-listed equities, the situation is less promising. Even if UK pension funds go down the Canadian route to consolidation, it looks unlikely that would be much of a panacea for UK-listed equities by boosting strategic allocations to them meaningfully. The global trend is to invest globally, fuelled by concerns over the concentration risk that accompanies home bias.
But the notion that UK firms have a higher cost of capital because of diminishing home bias is contested. Keith Ambachtsheer, director emeritus of the International Centre for Pension Management, argues that because of the global shift, domestic companies don’t suffer from access to capital. Canadian and UK pension funds are allocating away from domestic stocks, but the same is true, he says, of funds from Australia, Europe, the Middle East, Singapore and other countries. Things even out.
Consolidating funds should unlock cheaper ways to allocate to so-called productive finance. And given vast tax credits afforded to pension savers, it’s fair for the Treasury to have some say in where pensions are invested — should they so wish. But left to their own devices it is unlikely that the shift from domestically listed stocks will halt, let alone reverse, any time soon.
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