Driving Investment for a Better Society

The New Capital Consensus (NCC) has brought together a coalition of apolitical organisations to research and discuss policy reforms for the UK investment system. The new government has correctly identified that sustainable economic growth must be a top priority, recognising that the stock of UK savings and investments is a central driver for this growth. By shifting the perspective away from viewing the investment system merely as a source of systemic risk or taxation, there is a significant opportunity to utilise it as a financial intermediator that channels savings to UK firms requiring growth capital. This approach aims to create a virtuous spiral where higher investment rates drive a more productive economy, which subsequently drives further investment.

To understand the required reforms, NCC conducted over 40 interviews to map the reality of the investment system's capital stocks and flows. This research identified that the bulk of investment within the system is tied to retirement savings pooled in Defined Benefit (DB) schemes, Defined Contribution (DC) schemes, and life insurance. The current system suffers from three core market structural problems.

  • DB scheme fragmentation has stripped trustees of agency, resulting in herding behaviours and standardised asset allocation that contributed heavily to recent systemic risk losses.

  • An imbalance of power exists where asset owners generally conform to the off-the-shelf commercial offerings of portfolio and fund managers, rather than dictating mandates that serve savers.

  • The trifurcation of the market into DB, DC, and Retail sub-markets creates a fragmented and inefficient patchwork that fails to meet pensioner needs.

The system is currently driven by strong incentives like strict regulation, accounting standards that disincentivise DB schemes, and a hyper-focus on short-term volatility and liquidity risks over long-term returns. To counteract these ingrained practices, NCC proposes several targeted recommendations. Short-term goals include increasing DC contributions and extending the Regulatory Innovation Office's role to oversee the system's social purpose. In the medium term, the government must facilitate the consolidation of private DB pension schemes by allowing life insurers to establish Superfunds outside of Solvency II ring-fences. Furthermore, the system must remove the requirement for daily liquidity in DC markets and alter tax incentives to operate at the asset level to boost the appeal of productive UK equities.

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