The British are world leaders in weird traditions. In most villages there is at least one weekend of the year dedicated to chasing some walnuts down a hill while dressed as a heron, or offering libations to the trees, or just having a bonfire and singing a few songs about trying to kill the King. It’s all good fun and an important part of our heritage. However, there is one British tradition that must be stamped out. I refer of course to the strange and outdated custom of handing our retirement savings to people in other countries.
Britain is unique in this, as this little chart shows.
Every other comparable economy puts the pensions of its workers to work in its own economy, providing capital for businesses and infrastructure, but British pensions are much more likely to be invested other people’s economies. Britain is like a homeowner who saves up for an extension, then lends the money to the bloke next door so he can build a swimming pool. The terms of the loan may be sensible, but he’s the one going swimming (and his house will eventually sell for a lot more).
This is part of the reason that Britain, for all its academic and financial might, has the lowest business investment in the G7. It’s an old problem, but one that is becoming more acute as economic growth continues to stagnate: this morning’s GDP figures show the UK economy grew by just 0.1 per cent in the third quarter of this year.
Last night, two weeks after her make-or-break Budget, Rachel Reeves delivered the Chancellor’s annual Mansion House speech to the City’s biggest bigwigs and declared that this would change. “For too long,” she said, “pensions capital has not been used to support British start-ups or support our infrastructure needs.”
“More often than not,” Reeves added, “it is Canadian teachers… reaping the rewards of investing in British productive assets through their pensions schemes.”
What Reeves didn’t say was that Canadian teachers also take on the risk of investing in British productive assets. Take our water system, for example. Earlier this year, the pension fund for Canadian government workers, which is the largest shareholder in Thames Water, wrote its entire stake in the company to zero, wiping an investment that had been worth almost £1bn from its balance sheet.
However, Canadian public employees (and British university lecturers, whose £75bn pension fund also owns a big chunk of Thames Water) don’t have to worry too much about this, because the pension funds in which they invest are big enough to take on that risk. The problem with many British pension funds is that they are smaller and what they can invest in is more limited. In many cases, they head across the Atlantic, and your pension ends up among the huge pools of capital available to Mark Zuckerberg and Elon Musk. This is what that looks like in the long-term.
This is the problem that the Pension Scheme Bill, which will be introduced to parliament next year, is designed to solve, by encouraging the many different defined contribution and local government pension schemes, which Reeves described as “highly fragmented”, into “megafunds” that can shoulder more risk – and crucially, British risk. Reeves said last night that this could “unlock around £80bn for investment in private equity, including exciting growth businesses”.
The more interesting part of this is probably the 86 local government pension schemes that Reeves is proposing will be merged into eight “pools”. Local government is in dire financial trouble but its pension schemes are overfunded. The defined-contribution schemes in which the rest of us invest will not be forced to put their money in Britain, but Reeves hopes the “significant consolidation” of the market she is proposing will give them the means to do so, and her government will help develop investment opportunities that are a real alternative to America’s vast money machine.
This is highly rational policy supported across parties – Reeves credited Jeremy Hunt for having made inroads into some of her reforms – but it will be hard to corral Britain’s savings into supporting Britain when America (whose private equity firms feast upon our most promising businesses) is gearing up to become an even more blatant economic aggressor with the threat of new trade barriers and competitive deregulation. It was for this reason that both Reeves and the governor of the Bank of England, Andrew Bailey, spoke about resetting our relationship with Europe last night. One way or another, we are going to have to gamble on some new ideas.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: Justin Welby’s resignation has not fixed the Church of England]