It may not be the sexiest of headlines, but in a time of soaring inflation and general economic woe, the new agreement between the Local Government Pension Scheme and various Defined Contribution schemes represents a genuinely exciting opportunity.
Jeremy Hunt’s announcement at Monday’s Mansion House speech matters, not least because Britain is sorely in need of capital; only 20% of our growth comes from investment, and the other 80% from employment. The effects of this can be seen across our economy, with productivity stagnant since 2009 and trailing our G7 peers. Our lack of ability or willingness to invest in automation and robotics is misallocating labour, driving down standards of living and real wage growth. The new Mansion House Compact means more liquid capital available for investment, into unlisted companies, which in turn can scale up and drive productivity across the country.
It comes on top of recent reforms which allow SMEs to invest an extra £100,000 via the Seed Enterprise Investment Scheme – a change advocated for by the Adam Smith Institute in our recent ‘Forgotten Medium’ paper. Likewise, the Chancellor’s reforms to Solvency II, unlocking £10bn of investment per year across the economy, will positively impact businesses small, medium, and large.
Critics have pointed to the downside risks facing future pensioners, especially those in the Defined Contribution and Local Government schemes. Their argument is that the British market for investment is too unstable and does not generate enough value to satisfy the anticipated growth in demand on pension funds as the population ages. They believe that it is an opportunity for City investors to make a quick buck and exit businesses, instead of scaling them up and spinning them out. New research by Oliver Wyman and the British Business Bank, outlines why the Mansion House Compact will make a difference here, by facilitating additional Venture Capital and growth equity investments.
While Downing Street talks a good game about Britain becoming a science and technology superpower, we are simply not in shape to deliver that ambition as things stand. Not only do we have a chronic shortage of both housing and lab space, but our investment environment is still far from ideal. That said, with the reforms outlined by the Chancellor, Britain has a chance to forge a new path, building up and out with sustainable, productivity-enhancing businesses.
The majority of these growing medium-sized businesses exist in capital intensive areas, such as production, retail, and professional, scientific, and technical services. Higher interest rates, caused in part by excessive quantitative easing during the pandemic, mean regular capital allocation is becoming steadily out-of-reach for scale-ups. It is to the credit of the Lord Mayor and the Chancellor that they have recognised this and providing a suitable solution.
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