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The writer is an FT editor
When the shortcomings of the British pension system are analysed, attention is often focused on Canada and its giant pension funds. These have become major players in international finance, particularly through the direct management of private assets.
Britain’s plan to boost investment in the economy and stop the withdrawal of funds from domestic equities relies heavily on consolidating pension funds to make them look more Canadian. But would this solve the UK’s problems? Looking at the two countries, the flow from Canada to the UK is complicated.
Some of the problems of the two economies are actually similar. Britain’s GDP per hour worked has grown by a paltry 0.6 percent per year since 2015, about half the U.S. rate. Canada’s productivity growth has been almost identically dismal.
The consensus among experts in both countries blames the lack of domestic investment for the problem. In late 2023, more than 70 British business leaders wrote an open letter to Chancellor of the Exchequer Jeremy Hunt complaining that pension funds were draining the UK of capital and calling on him to do more to reverse the decline in domestic equity investment in pensions. Months later, 92 Canadian business leaders sent a similar letter to Canada’s finance minister.
This problem arises despite the fact that both countries have huge amounts of money in their pension systems. Calls to increase domestic investment must be relative to the opportunities available. And this is where some of the differences between the countries lie.
While Britain has opened up its major airports, electricity grid, water and waste networks to private funds, opportunities for Canadian pension funds to invest in their own critical infrastructure have been few and far between. Where investment opportunities have arisen—for example, financing and building Montreal’s subway system—pension funds have seized them. Canadian schemes can hardly be blamed for not trying. And capital has flowed into British infrastructure, regardless of nationality.
That said, Britain’s ability to deliver new investment projects to meet potential local demand is questionable. Earlier this year, a report by the Purposeful Finance Commission, a forum of regional government officials, found such a lack of local planning expertise that it recommended that investors band together to fund additional planning officers to help clear the backlog of applications. If newly consolidated British pension funds try to allocate new money to British infrastructure investment, they could run into problems. British policymakers, like their Canadian counterparts, will need to focus as much on supply as demand if they want to stimulate investment.
When it comes to capital for growth companies, the problem is not so much supply in the UK. The UK does not suffer from a lack of high-quality early-stage companies. The country has become the largest European hub for venture capital and growth capital, raising more than the two largest markets combined, even without domestic pension capital. The problem is more a lack of capital to support growth companies as they scale up. Consolidation schemes could open the door to higher allocations to risky venture capital investments that tend to deliver high long-term returns for investors and the economy.
For UK-listed equities, the picture is less promising. Even if UK pension funds take the Canadian route to consolidation, it seems unlikely that this would be a panacea for UK-listed equities by meaningfully increasing strategic allocations to them. The global trend is to invest globally, fuelled by concerns about the concentration risk associated with home bias.
But the idea that British companies are facing a higher cost of capital because of the declining home bias is being challenged. Keith Ambachtsheer, emeritus director of the International Centre for Pension Management, argues that domestic companies are not suffering from access to capital because of the global shift. Canadian and British pension funds are allocating away from domestic equities, but so, he says, are funds from Australia, Europe, the Middle East, Singapore and elsewhere. Things are evening out.
Consolidation funds should unlock cheaper ways to allocate to so-called productive finance. And given the huge tax breaks pension savers get, it’s fair that the Treasury should have some say in where pensions are invested – if they want to. But left to their own devices, the shift away from domestically listed equities is unlikely to stop, let alone reverse, any time soon.