Britain is banking on this $3 trillion cash cow to revive its economy

London CNN

The UK economy desperately needs a boost, and the government is hoping that the vast pension funds of the country can provide it.

UK Finance Minister Jeremy Hunt announced on Monday that nine of Britain’s largest pension providers have agreed to increase investments in high growth UK companies. He said that this move could unlock up to PS50billion ($64.5billion) of funding if others pension funds followed suit.

In the Compact, companies such as Aviva (AIVAF), Legal & General(LGGNY)and Mercer committed to allocating at least 5% assets from their default funds by 2030 to unlisted firms. Savings plans in the UK offer default funds that are automatically selected by savers if they don't select their own investment strategy.

Hunt told hundreds of senior executives in London that British pensioners should be able to benefit from the success of British businesses.

He added that 'unlocking investment' would increase retirement incomes by more than PS1,000 ($1,300). It could also direct funds to 'our most promising businesses, driving growth in Britain'.

The measures to access pension funds cash are crucial for an economy that is suffering from high inflation, low investment and a weak growth. The government faces pressure from London, which is the heart of Britain's vital financial services industry, to provide post-Brexit advantages.

Hunt also announced draft legislation to make it easier to list companies in London. He also revealed plans to repeal almost 100 pieces 'unnecessary retained’ European Union laws.

Hunt stated in his speech that he wanted the fastest-growing businesses to list and grow here on the London Stock Exchange, making it not only Europe's Nasdaq, but also much more. We want to make the London Stock Exchange the global capital of capital.

London has lost assets and jobs to the capitals of the EU including Frankfurt, Paris and New York since Britain left the EU.

In recent months, a number of London-listed companies also considered dual listing their shares or moving their listings from London to the United States. In March, the decision by UK-based chipmaker ARM to list on Wall Street, the crown jewel in the UK's tech sector, was a painful blow.

Hunt's Mansion House Reforms hope to make Britain the place for businesses that want to grow and get capital by channeling more UK pension savings - worth a collective PS2.5 trillion ($3.2 billion) - into high growth companies.

The 'Edinburgh Reforms,' announced in December, are the biggest overhaul of British financial services policy for two decades.

The Mansion House pensions reforms and deal will'mark an historic turning point', said Nicholas Lyons. Lyons is the head of City of London Corporation which governs and promotes City of London - the historic financial district of the UK capital.

He added that the compact would'support businesses to grow, remain and list in UK'.

London Stock Exchange CEO Julia Hoggett stated that the reforms will 'go a very long way' in ensuring UK capital market can 'fund institutions and companies that drive innovation'.

Unlocking pensions

The UK has the second-largest pension market in the entire world, after the United States. However, UK pension funds are much less exposed to equity than their international counterparts.

According to New Financial, UK pension funds reduced their exposure to equity from 73% down to 27% over the last 25 years. They also quadrupled bonds.

The UK pension funds' exposure in domestic stock markets fell even more dramatically: from 53 percent in 1997 to 6 percent in 2021.

New Financial estimates that only 11% of UK pension funds are invested in alternative asset categories, such as private equity, hedge funds and infrastructure. This compares to a global average investment of 19%. This has affected returns which, according to a report by the think-tank, are "firmly in the bottom of the pack" globally.

The consolidation of pension funds is another new reform aimed at boosting investment in UK businesses. This program assumes that larger funds can invest in more assets and provide better returns to savers.

Hunt announced that he would consult with local governments on increasing their private equity investments to 10%, which could free up PS25 billion ($32.3billion) by 2030.

He said that the UK will create the world's first 'intermittent market', which will allow private companies to gain access to public markets without having to list.

Nigel Peaple is the director of policy and Research at the Pension and Lifetime Savings Association. The association represents the majority of large pension funds.

He added that the combination of measures will likely have a 'far-reaching effect' on the type of assets that pension funds invest in. This will ease companies' access the capital needed to grow.