Rachel Reeves used her annual Mansion House speech last night to try and convince City grandees she has a plan for growth after last month’s £40 billion tax-raising Budget, new labour laws and an increase in the minimum wage.
So what? Not everyone left dinner in the Square Mile satisfied. The chancellor’s proposed reforms focus on reforming the UK’s piecemeal pensions system, but it’s going to take a lot more work – and some good fortune – to improve the UK’s anaemic growth forecast and restore the shimmering appeal of its capital markets.
By the numbers:
40 – per cent decrease in the number of UK-listed firms since 2008.
4 – percentage share of UK pension savings invested in domestic equities, the lowest bias in favour of homegrown companies in the developed world.
19 – ongoing bids for FTSE 350 companies, vs just two in the whole of last year. Peel Hunt, an investment bank, describes the UK as a “happy hunting ground” for corporate, foreign and private equity bidders, due to low valuations and willing sellers. UK listed markets lost £97 billion in value from bids and delistings this year.
Reeves said in her speech that regulation which sought to eliminate risk-taking in the aftermath of the financial crisis had “gone too far.” Her changes build on pension reforms started by her predecessor, Jeremy Hunt.
Oh Canada. Reeves wants to mimic large Canadian and Australian pension schemes by consolidating 86 local government pension pots into six “megafunds” holding between £25 and £50 billion of assets each.
- This pooling of funds should allow local government pots to save around £1 billion in fees paid to lawyers, banks, advisers, asset managers and actuaries each year.
- It should also let them make higher risk investments, including in infrastructure projects critical to growth. Canada’s pension schemes, the Maple 8, invest around four times more in infrastructure than defined contribution schemes in the UK do, while Australia pension schemes invest around ten times more in private equity. One Canadian fund, PSP, this week acquired the UK’s AGS airports operator for £1.5 billion.
Scale is helpful, but pension fund managers will only invest in UK assets if they’re certain the returns are competitive and will meet their liabilities. Reeves has so far ruled out mandates: “Carrots are better than sticks to make this happen is the market view,” says John Godfrey, former corporate affairs director at Legal & General.
In addition, Reeves will
- rethink “name and shame” proposals under which the FCA intended to publicly name companies under investigation at a much earlier stage.
- pilot a digital gilt, based on blockchain, that follows innovations like green bonds.
- launch Pisces, a “world-first” exchange that allows private firms to trade shares at intervals in a similar style to the public markets and acts as a “stepping stone” for firms thinking of going public.
- consult on the Stewardship code, which outlines how asset managers can invest “responsibly” on behalf of savers. “It’s clear that we’re going to have to invest more as a country in defence,” says Godfrey. “We have to make sure that is not held up or blocked by unnecessary stewardship difficulties which come through ESG.”
Tailwinds. There are a few bright spots for UK markets (and Reeves). Mark Austin, partner at Latham and Watkins, says that “key friction points that built up in the UK markets in the past 10 to 20 years have now been removed” partly due to reform of listing rules by the FCA in July.
Recent turbulence after elections in France, Germany and Austria has also repositioned London as a safe haven for capital in Europe. The UK’s deficit in traded goods with the US reduces its chances of it being a target for Trump’s tariffs.
Put those together and “the UK starts to look like a well-positioned, large, stable, independent, well-regulated, rule of law-governed, reformed and frictionless listing location and financial centre,” says Austin.
NICs in a twist. Reeves’ Mansion House package might be well-received in the City, but in wider business circles her £25 billion tax rise on employers, announced in the budget, is not landing well, particularly with
- supermarkets warning the hit could be passed onto grocery prices;
- social care services arguing for an exemption; and
- hospitality businesses saying they will be forced to close.
What’s more… Last night Andrew Bailey, governor of the Bank of England, accompanied Reeves in making the point that growth depends, more than any tinkering, on “rebuilding relations” with the EU.
