Revolutionizing the UK Pension System for Economic Growth
Introduction
Britain’s pension system is in need of a major overhaul to stimulate business investment and drive economic growth. The Resolution Foundation, a leading think tank, argues that the creation of “superfunds” is crucial to this transformation. These funds can acquire controlling stakes in large companies, allowing them to actively engage with management and influence long-term strategy. The current decline in capital spending by British businesses is identified as a key reason why living standards have not improved in line with other wealthy countries. Despite Brexit and unfavorable tax conditions often being blamed, the main issue lies in a lack of willingness among managers to invest, even though returns are favourable.
Challenges in the UK Pension System
The UK’s pension system faces several challenges that hinder investment and economic growth. The ownership of listed companies is widely dispersed and predominantly held outside the country, reducing accountability and pressuring managers to prioritize long-term growth. Furthermore, workers in the UK lack the formal role in corporate governance that is common in other European countries. This lack of pressure on managers to focus on long-term growth prevents the development of clear and sustainable strategies for UK companies.
Promoting Consolidation in the Pensions Sector
The Resolution Foundation urges the government to implement a series of reforms to encourage consolidation in the pensions sector. This consolidation would result in fewer, larger, and actively managed funds that have the capacity to acquire significant stakes in listed companies. By having a stronger voice, these funds can engage with management and influence strategic decision-making. One proposal to facilitate consolidation is to allow the Pension Protection Fund to take over legacy defined benefit pension schemes, which are currently often sold to insurance companies when an employer becomes insolvent.
Moreover, the Resolution Foundation suggests that existing policies aimed at promoting consolidation of small defined-contribution pension schemes should be “turbocharged.” Consolidating these schemes would lead to the formation of larger funds that can invest in riskier assets, including UK shares. This approach is aligned with ideas previously put forward by other think tanks, such as the Tony Blair Institute.
The Role of Shadow Chancellor Rachel Reeves
Shadow Chancellor Rachel Reeves supports the consolidation of UK pension funds and proposes potentially forcing them to invest in a growth fund for fast-growing UK companies. However, Greg Thwaites, Director of Research at the Resolution Foundation, argues that simply making more capital available or tinkering with the tax system will not be sufficient. Instead, he advocates for the government to create top-down pressure through investors and bottom-up pressure through the workforce to encourage firms to invest.
Recommendations for Government Action
Alongside promoting consolidation in the pensions sector, the Resolution Foundation suggests several measures that the government should take to stimulate investment and economic growth:
- Introducing a requirement for large and public companies to include employee representatives on boards of directors: This would provide workers with a formal role in corporate governance, promoting long-term growth strategies.
- Making permanent the temporary tax break on capital spending: This would provide stability and encourage companies to invest in capital assets that drive growth.
- Easing planning rules that hinder commercial development and housing: This would facilitate the creation of new high-tech clusters and support investment in renewable energy.
Investing in the Future
The Resolution Foundation’s recommendations align with the imperative to invest in the future to boost savings and prosperity in the UK. Chancellor Jeremy Hunt has signaled his intention to launch reforms in the autumn to encourage consolidation in the pension sector, allowing funds to take riskier bets on unlisted companies. These actions, combined with other proposed reforms, can create an environment that encourages firms to invest, stimulating economic growth and improving living standards.
Engaging Additional Piece – Unlocking the Potential of Superfunds for Economic Revitalization
The proposed transformation of the UK pension system through the creation of superfunds holds immense potential for economic revitalization. By consolidating pension funds and allowing them to acquire significant stakes in listed companies, these superfunds can actively engage with management and influence long-term strategic decisions. This engagement not only ensures accountability but also promotes sustainable growth and maximizes returns for investors.
Superfunds offer a unique opportunity for investors to have a more substantial say in the companies they invest in. This push for increased involvement in corporate governance aligns with global trends towards responsible investing. Shareholders are becoming more conscious of the impact their investments have on society and the environment, and superfunds can provide a platform for investors to actively shape company strategies that prioritize long-term growth and ESG (Environmental, Social, and Governance) principles.
Beyond their impact on company management, superfunds have the potential to drive economic growth by funneling investment into promising sectors and projects. With their larger size and resources, superfunds can take bold risks that smaller pension funds shy away from, such as investing in startups, unlisted companies, or infrastructure projects. By doing so, they can provide much-needed capital to fuel innovation, job creation, and infrastructure development.
Furthermore, superfunds can play a pivotal role in addressing the funding gap for high-growth companies. Many of these companies struggle to secure adequate funding for expansion, leading to missed potential for economic growth. By consolidating pension funds and directing investment towards fast-growing UK companies, superfunds can bridge this funding gap and enable these companies to scale up, create jobs, and drive innovation.
The success of superfunds ultimately depends on government support and the implementation of reforms that incentivize their formation and operation. The government should work in collaboration with regulators and stakeholders to streamline the regulatory framework, reduce barriers to entry, and establish governance standards that ensure transparency and accountability. By doing so, the government can create an environment that attracts both domestic and international capital and positions the UK as a hub for responsible investing and sustainable economic growth.
In conclusion, revolutionizing the UK pension system through the establishment of superfunds holds immense potential for economic growth and increased prosperity. By promoting consolidation, empowering investors and workers, and supporting strategic investments, the UK can unlock the full potential of its pension system and position itself as a global leader in responsible investing and sustainable economic development.
Summary
Britain’s pension system needs a transformation to stimulate business investment and drive economic growth. The creation of “superfunds” that can acquire controlling stakes in large companies is essential to achieve this. The decline in capital spending by British businesses is a key reason why living standards have not improved compared to other wealthy countries. The main challenge lies in a lack of willingness among managers to invest, despite favorable returns. The UK pension system lacks accountability due to dispersed ownership and a limited role for workers in corporate governance. The Resolution Foundation proposes reforms to encourage consolidation in the pensions sector, allowing funds to actively engage with management and influence strategic decisions. Additionally, there should be a requirement for employee representatives on company boards, making the temporary tax break on capital spending permanent, and easing planning rules to promote commercial development and renewable energy investment. These reforms, along with superfunds, present an opportunity to revolutionize the UK pension system for economic growth and improved living standards.
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Britain needs to overhaul its pension system to create “superfunds” that can take controlling stakes in big companies and drive business investment, a leading think tank has argued.
According to economists, a long-term decline in capital spending by British businesses is a key reason why living standards have not improved in line with those of other rich countries.
The Resolution Foundation said in a report released Thursday that managers face increased pressure from shareholders and employees to invest for the long term.
While the UK’s weak investment is often attributed to Brexit or an unfavorable tax regime, the think tank said the main reason was that too few managers wanted to invest, despite good rates of return.
It found that ownership of listed companies was dispersed and based largely outside the UK, while workers lacked the formal role in corporate governance common elsewhere in Europe. This meant that UK managers were under “extraordinarily little pressure. . . focus on long-term growth.”
“Too few UK companies have large shareholders with a clear incentive and the ability to hold management accountable to have a long-term growth strategy,” the think tank said.
The Resolution Foundation has urged ministers to launch a series of reforms to encourage consolidation in the pensions sector, creating fewer, larger, actively managed funds that could take large enough stakes in listed companies to engage with management and influence the strategy.
One measure to help with this consolidation would be to allow the UK’s Pension Protection Fund, which currently absorbs pension funds when an employer becomes insolvent, to take over legacy defined benefit pension schemes which are currently often sold to insurance companies.
The Resolution Foundation also called on the government to “turbocharge” existing policies to promote consolidation of the thousands of small defined-contribution pension schemes and said the resulting larger funds would be better able to invest in riskier assets, including UK shares.
These proposals build on ideas put forward by other think tanks, including a relationship released last month by the Tony Blair Institute.
In March, Chancellor Jeremy Hunt signaled he would launch reforms in the autumn to encourage consolidation of the pension sector so that funds could accept riskier bets on unlisted companies.
The shadow chancellor, Rachel Reeves, also wants to consolidate UK pension funds and potentially force them to invest in a growth fund for fast-growing UK companies.
But Greg Thwaites, director of research at the Resolution Foundation, said simply making more capital available or endlessly “tinkering” with the tax system wouldn’t work. Instead, the government should “do much more to encourage firms to invest, creating top-down pressure through investors and bottom-up pressure through their workforce.”
The Resolution Foundation also urged Hunt to introduce a requirement for large and public companies to include employee representatives on boards of directors and to immediately make permanent the temporary tax break on capital spending announced in the March budget, pledging at the same time to keep the corporate tax regime stable.
He also advocated easing planning rules that he said have hampered both commercial development and housing, preventing the creation of new high-tech clusters and halting onshore investment in renewable energy.
https://www.ft.com/content/d7e1eee6-99de-48de-b11f-8bf3ade79db2
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