In September, abrdn sponsored a report from influential think tank, New Financial regarding two ‘parallel crises’ in UK pensions and capital markets. Ahead of Jeremy Hunt’s much-anticipated Autumn Statement, New Financial’s Managing Director looks ahead to the policy levers available to the Chancellor as he looks to counter stubbornly high inflation while reinvigorating the UK’s flagging economy and capital markets. 
In September, abrdn sponsored a report from influential think tank, New Financial regarding the two ‘parallel crises’ in UK pensions and capital markets. Ahead of the Jeremy Hunt’s much-anticipated Autumn Statement, we posed some key questions to New Financial’s Managing Director, William Wright, on the key policy challenges facing the Chancellor and how he could begin to address structural issues across UK pensions and capital markets. 

…we expect that measures to unlock more investment in the UK will also be prominent. 

William Wright, Managing Director, New Financial

How would you describe the policy backdrop for UK pensions and capital markets ahead of the Autumn Statement?

The debate on UK pensions and capital markets has moved up the political agenda in the past few years. The key policy challenge is how to address the paradox in the UK: on the one hand we have huge pools of long-term capital in the forms of pensions, insurance, and retail assets (circa £6 trillion). But on the other, only a small and decreasing share of that capital is being invested in long-term productive assets such as UK equities, infrastructure, and growth companies. This structural decline in long-term domestic investment over the past few decades has significant implications for the UK’s growth, productivity, and prosperity.

The UK government’s focus has been on how to unlock more of this capital, in insurance through reforms to Solvency II, in pensions through the Mansion House reforms in July, alongside the wider Edinburgh Reforms package across the capital markets that was outlined last year.

What are they key areas you expect to see the Chancellor address?

It is always dangerous to try to predict what is going to be announced in advance, particularly given the challenging economic and political backdrop for the Autumn Statement. The focus of the Statement is likely to be on the government’s wider economic policy and the outlook for the UK economy, but we expect that measures to unlock more investment in the UK will also be prominent.

We would be surprised if the Statement does not include an update of the Mansion House reforms with concrete proposals to implement them. These proposals could include the launch of a fund vehicle to enable more defined contribution pension schemes to invest a small portion of their assets into venture capital and growth equity, perhaps in collaboration with the British Business Bank. We also hope the Statement will provide clearer direction for the £370bn Local Government Pension Scheme to increase their allocation to unlisted equities. Additionally, we’d like to see the Statement outline different options to enable and accelerate the consolidation of the over 5,000 defined benefit pensions schemes in the UK.

Should we be expecting any surprises?

With a general election looming it is unlikely that the Statement will include radical reforms to the structure of the UK pension system, such as adopting a more aggressive approach to pensions consolidation along the lines of the Australian model. It is also unlikely that the government will pursue more costly policies, such as resurrecting child trust funds and giving £1,000 to every newborn child to be invested on their behalf.

If the government wanted to move quickly it may announce reforms to ISAs. With ISAs holding more than £400bn in assets, they are a significant pool of long-term capital in their own right. The Chancellor could therefore consider reintroducing a minimum threshold for the proportion of new investments in ISAs to be held in UK assets, thereby bolstering UK capital markets.

Looking longer term, how do you expect this debate to evolve?

The structural decline in domestic long-term investment in the UK has been decades in the making and is not going to be solved in one go. Over the coming decade, this government and future governments will need to focus on rebuilding a pensions system fit for the next 50 years, encouraging and incentivising more investment in UK assets, and on wider economic measures (such as planning, infrastructure, and energy) to help make the UK a more attractive investment proposition for domestic and overseas investors alike. It is encouraging to see more interest in and understanding of this issue across the political spectrum, and we hope to see this reflected in next week’s Statement.

Read New Financial’s report on the parallel crises in UK pensions and capital markets, including a foreword from abrdn CEO, Stephen Bird here