Changing pension rules won’t boost UK business investment

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Often in politics, a bad idea presents itself when its time has finally come. The current contender in the UK is the belief that some changes to pension rules will flood thriving companies with much-needed funds, bail out the troubled stock market, improve returns for future retirees and fix long-standing weakness in business investments.

Chancellor Jeremy Hunt said in his March budget that his plans, to be announced in the autumn, “will unlock productive investment from defined-contribution pension funds and other sources, make the London Stock Exchange a more attractive place to list and complement the our response to the challenges posed by the US Inflation Reduction Act”.

Not to be outdone, Rachel Reeves, the shadow chancellor, wants to consolidate UK pension funds and perhaps force them to invest in a future growth fund for fast-growing UK companies, because, he tweeted this week, lack of access to capital is known to be holding back British businesses. “Nothing is out of the question,” he told her.

In seeking an evidentiary basis for these claims, the first place to start is the question of whether UK companies are constrained by lack of funding. The beleaguered CBI has the best data on this, covering manufacturing, service and financial firms, with manufacturing data going back to 1979. It is immediately obvious in this data that a lack of external finance is usually the least of the list of bottlenecks for companies. investment companies. The same goes for other industries.

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There is a little more evidence that smaller companies with intangible equity face some financial constraints because they lack the necessary collateral to secure loans. In response, entrepreneurs use their properties as real estate. But Bank of England researchers found that a steep 10% rise in house prices could boost investment in these smaller companies by just £4.5bn. So there is no constraint on small business financing that is relevant to the UK’s £2.5 trillion economy.

The complaints by Reeves and the Tony Blair Institute that Canadian and other international pension funds are investing in British companies only serve to highlight that British companies can attract finance.

The second question is whether pension funds should take more risk. Defined benefit pension regulations since the 1990s may have gone too far in preventing equity investment in favor of government bonds. But if one takes this view, it is strange to believe that the best place for British workers to park their funds is in UK equity assets.

Employees are already highly exposed to UK-specific risks and it would be bizarre for the government not to allow pension funds to seek the best returns around the world.

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These issues are just warm-up acts. The central problem is that the lack of investment by UK businesses is rooted in UK companies not wanting to increase capital spending.

Car manufacturers, such as Stellantis, complaint that the regulatory landscape is not conducive to investment in Britain. Planning and permitting difficulties hamper the development of renewable energies with investment timing up to 12 years for offshore wind, 10 years for onshore wind and four years for major solar projects to be implemented. Syndicated loans to smaller companies in the UK declined after the 2016 Brexit referendum, mainly due to declining demand for finance.

Domestic and overseas companies simply don’t think the UK is the best place to invest. That’s why business investment has stalled.

We know and understand that politicians are too scared to say the words ‘planning’ and ‘Brexit’ before an election. But if our leaders don’t focus on the real issues, they won’t succeed in office. And Britain’s investment failure will only continue.

chris.giles@ft.com