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Britain needs to overhaul its pension system to create “superfunds” that can take controlling stakes in large companies and drive business investment, a leading think-tank has argued.
A long-term decline in capital spending by UK businesses is a key reason why living standards have not improved in line with those of other rich countries, according to economists.
The Resolution Foundation said in a report published on Thursday that managers needed to be put under more pressure by shareholders and employees to invest for the long term.
Although the UK’s weak investment is often blamed on Brexit or an unfavourable tax regime, the think-tank said the main reason was that too few managers wanted to invest, despite good rates of return.
It noted that ownership of listed companies was dispersed and largely based outside the UK, while workers did not have the formal role in corporate governance common elsewhere in Europe. This meant UK managers were under “uniquely little pressure . . . to focus on long-term growth”.
“Too few British firms have large shareholders with a clear incentive and ability to hold management to account for having a long-term growth strategy,” the think-tank said.
The Resolution Foundation urged ministers to launch a series of reforms to encourage consolidation in the pensions industry, creating a smaller number of larger, actively managed funds that could take big enough stakes in listed companies to engage with management and influence strategy.
One measure to help with this consolidation would be to allow the UK’s Pension Protection Fund, which currently absorbs pension funds when an employer becomes insolvent, to buy out legacy defined benefit pension schemes that are often sold to insurance companies at present.
The Resolution Foundation also called on the government to “turbo-charge” existing policies to boost consolidation of the thousands of small defined contribution pension schemes, and said that the resulting bigger funds would be better able to invest in riskier assets, including UK equities.
These proposals build on ideas set out by other think tanks, including a report published last month by the Tony Blair Institute.
In March, chancellor Jeremy Hunt signalled that he would set out reforms in the autumn to encourage pension industry consolidation so that funds could take risker bets on unlisted companies.
The shadow chancellor, Rachel Reeves, also wants to consolidate UK pension funds and potentially force them to invest in a growth fund for fast-growing British companies.
But Greg Thwaites, research director at the Resolution Foundation, said simply making more capital available, or “tinkering” endlessly with the tax system, would not work. Instead, the government should “do far more to encourage firms to invest, creating pressure from above via investors and pressure from below via their workforces”.
The Resolution Foundation also urged Hunt to introduce a requirement for listed and larger companies to include worker representatives on boards, and to immediately make permanent the temporary tax break on capital spending announced in the March budget, while committing to keep the corporation tax regime stable.
It also argued for the loosening of planning rules that it said hindered both commercial development and housing, preventing the creation of new high tech clusters and blocking onshore investments in renewable energy.
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