Darren Philp: Initiatives like this are totally unnecessary
I was surprised, to say the least, when I read last week that the London Stock Exchange Group had coordinated a letter from FTSE CEOs pretty much begging the government to force UK pension funds to invest in their companies.
So, what's this all about? Over 250 plus senior business leaders have written to chancellor Rachel Reeves arguing that 25% of DC default funds should be invested in the UK. Pension schemes could offer other funds with less than the suggested 25% allocation, but the default – the one with most people in – will be mandated to have at least 25% in UK assets.
In other words: "We haven't made ourselves attractive enough to investors… let's get the government to compel the money in instead." That's maybe a bold – some might say desperate – strategy.
Getting the country back on track
There are some good arguments in the letter in support of how to get the country's anaemic growth and productivity back on the right track, and the consequences of not doing so.
I would certainly agree that underinvestment and short termism have played a massive factor in the UK's performance over recent years, some of it, of course, very much self-inflicted (Brexit anyone?). And also, let's not talk about the political and economic uncertainty that has been caused by the late Budget…
But to rehearse an argument that I, and indeed many others, often use – pension schemes will invest where they can get the right return, at the right risk, at the right price point. That coupled with an effective ESG overlay is all that pension schemes should be focussed on when it comes for delivering long term value and returns for savers.
Start closer to home
If we can create the right environment where that capital naturally flows to UK businesses then that's fantastic – a double win.
But surely, we need to get those conditions right first. This involves creating the right economic conditions for growth and grappling with the structural, regulatory and fiscal issues that are holding back innovation, entrepreneurship and investment.
First and foremost, we need a coherent economic narrative and the government needs to wake up to that. Levying taxes that stifle growth to fill a fiscal black hole is bound to have economic repercussions – cakeism doesn't work.
But we also need to look at the behaviour of the companies themselves. Is there too much short-term decision-making, focussing on quarterly/yearly performance rather than long term prospects?
If these were good investments then pension fund money would naturally flow… so something is going awry, and while this might be a lack of capital, my bet is there is something more fundamental at play.
I was thinking that if there is a desperate need for capital, why have we been in a rude period of health for share buybacks? According to the Financial Conduct Authority, FTSE 350 companies returned over £250bn via buybacks between 2017 and 2024, with activity skewed to the last few years.
Why have these companies that have run buybacks prioritised this over investment for long term growth? If these companies so desperate for capital, the question is what is going on? And what is the motivator for these buybacks when there is a desperate need for pension fund capital?
There is also a wider point… how would those CEOs like it if some externals were to tell them how to invest their money?
I'm sure they'd soon be squeals from those boardrooms and the same should apply to pensions. As someone who is in a DC scheme, I'd say hands off my pension, the same message that would go to the government… I'm not saying I don't want to invest, I'm saying that I want the investment professionals acting on my behalf to invest for the right reasons!
I for one, believe that mandation and initiatives like this are totally unnecessary. I would argue that they are damaging to the cause as they emphasise the fragility of our economy and wider business environment.
I can see the need for us to unlock pension fund investment, and voluntary accords (like the Mansion House Accord and the Sterling 20 initiative) have a role to play in encouraging debate and discussion and, hopefully, in identifying and working through some of the blockers.
Capital markets respond to credible growth stories. If UK equities are struggling to attract pension fund money, maybe the question for FTSE boards is: what are you doing within your own business to make you more attractive and what have you done with the capital you already had?
Darren Philp is co-founder of Untamed Consulting and co-host of the V-FM Podcast
