Jeremy Hunt badly needs some good news. After weeks of gloomy economic data, especially on inflation, on Monday the chancellor will turn to the City of London in the hope of channelling billions of pounds of the UK’s pensions savings into boosting growth.
Hunt’s annual Mansion House speech comes at a crucial time for an economy hobbled by anaemic growth, poor investment and stubbornly high inflation. Help may be at hand among his “business-attired” audience at the lord mayor’s official City residence.
The chancellor, in an interview with the Financial Times, said he wanted to work with the financial services industry to release capital for fast-growing companies, by changing rules that are holding back investment.
After months of speculation about his intentions, Hunt made it clear he would not order the City what to do or where to put its money. “This is about evolution, not revolution,” said Hunt: “We are not seeking Big Bang II on this.”
Hunt has high hopes of an investment deal, to be announced on Monday by lord mayor Nicholas Lyons, the veteran banker and insurance executive, who has persuaded companies to commit up to £50bn to private equity and early stage businesses in areas such as fintech and life sciences.
The voluntary pact by some of the biggest players in the financial services sector to put 5 per cent of investments in defined contribution pension schemes into what Hunt calls “productive assets”, has helped to end fears in the City that the chancellor could instruct them to switch billions into privately owned high-growth companies.
“We aren’t going to do mandation,” said Hunt, shirt-sleeved in his 11 Downing Street office. “The requirement that you invest a certain proportion of your assets in UK funds is not on the table.”
He said members of defined contribution schemes would enjoy greater returns if their savings were invested in high-growth companies, saying they should take the lead from Australian and Canadian equivalents.
But the chancellor said he would not be forcing UK funds to look inwards only to British investments. One of three “golden rules” he will set out in his Mansion House speech aims to respect how London is “the most international of financial centres”.
“There’s going to be a big commitment to invest in productive assets, but it will not be a UK commitment,” said Hunt. “You come to London because you have experts here investing all over the world, where they get the best returns.”
The City of London Corporation, the Square Mile’s local authority, on Friday talked about achieving “a modest 5 per cent allocation” of defined contribution scheme investments to private equity and hoped that “the majority” would be UK asset classes.
While the Lyons initiative is a statement of good intent, does Hunt think a collaborative approach with the City alone will deliver his objective of getting billions more of the country’s savings into high growth companies?
“Yes,” he said, adding he would change the regulatory environment to achieve his goals. A series of government consultations and “calls for evidence” will begin this month and conclude in September, with decisions to be announced in Hunt’s Autumn Statement.
A second “golden rule” will state the reforms should be in the interests of savers to ensure they get the best returns, a vow intended to allay concerns in the City that Hunt might try to raid the country’s pensions and force them to invest in riskier assets.
“This is not an attempt to divert capital into productive assets in a way that would be detrimental to the interests of pension fund holders,” he said.
But he would change regulatory restraints “on things like value-for-money requirements that are focused on fees rather than returns”, which he said were “steering people away from less liquid, higher growth assets”.
Hunt meanwhile said he wanted to see Britain’s highly fragmented pensions market — with about 28,000 defined contribution schemes — consolidated and was prepared to get tough with inefficient funds if they did not do so voluntarily.
“We will look at whether there should be powers of intervention in situations where it’s highly unlikely a fund is able to get the returns it needs,” he said. Australia and Canada again provide the model.
Hunt will seek to merge some of the 80 or so local government pension funds.
He will keep an open mind on more radical proposals for consolidation of funds and is likely to issue a “call for evidence”, but Treasury insiders said the chancellor is instinctively cautious.
One option on the table is a plan by the Tony Blair Institute, a think-tank, for tens of thousands of public and private sector pension plans to be pooled into “GB superfunds” that would invest in UK start-ups and other companies.
Hunt’s third “golden rule” is a recognition that he still needs Britain’s old-style defined benefit pension schemes, where payments are linked to salaries, to carry on funding government borrowing. In this area, Hunt said there will be “no dramatic change”.
“Those who invest in our gilts are helping to fund vital public services and support for households facing high energy bills,” Hunt will say in his Mansion House speech. “Any changes must recognise the vital role they play.” Britain’s debt now stands above 100 per cent of gross domestic product.
The final part of Hunt’s plan is to reform Britain’s listings regime to make London a more attractive place to raise capital for new companies.
He said he proposed to roll back part of the EU’s Mifid II rule book on so-called bundling of equity research following a review by Hogan Lovells lawyer Rachel Kent. The rules barred investment banks from providing company research for free alongside brokerage services.
“We’re going to implement Rachel Kent’s review that will allow people to opt out of unbundling,” he said. “That’s really important because if we’re going to be the world’s next Silicon Valley we need a really strong research sector that’s able to give valuations of companies with no profits and no assets.”
The Treasury has indicated its support for a recommendation that a new platform be created as a “one-stop shop” for investors to access research on listed companies.
On Friday, London Stock Exchange boss Julia Hoggett said the UK was in a “global foot race” with other financial centres.
What would success look like for Hunt as a result of all these reforms? The chancellor replied: “A much smaller number of pension funds with much higher levels of in-house expertise, able to pursue more balanced and — over the longer run — lower risk investment strategies, because they are more balanced and able to get better returns.”
Additional reporting by Josephine Cumbo