No, a British ISA won’t help UK firms – but pension funds might

Jeremy Hunt’s savings idea is a gimmick but pension funds offer more fertile ground for injecting cash into UK plc, says James Moore

London has struggled to attract new listings in the last year (PA Wire)

In an otherwise lacklustre Budget for business, the chancellor had two announcements to address Britain’s struggling stock market and the desperate lack of investment capital.

First, and most eye-catching, was the launch of a “British ISA”: an extra £5,000 tax-free saving allowance – on top of the usual £20,000 – for savings invested in UK shares.

Broker AJ Bell immediately put its finger on the problem: you can already choose to invest in UK stocks through the ISA existing allowance, and many savers do. However, only a tiny minority max out that allowance.

Any extra investment in UK plc generated through the British ISA will be a rounding error in the context of the £2 trillion value of UK firms. “Increasing investment into UK companies is a laudable aim, but this ill-conceived, politically-motivated decision will simply not achieve that objective,” says AJ Bell chief executive, Michael Summersgill.

Second, and far more significant in impact, was the stick Jeremy Hunt waved at the pensions industry. Only six per cent of UK pension assets are currently invested in UK shares, which is low relative to other countries. The chancellor confirmed plans to force pension firms to disclose their levels of UK equity investment, threatening “further action” if this is deemed insufficient. He also promised new powers to the Pensions Regulator and Financial Conduct Authority aimed at making the industry offer better value for money.

“How these requirements will dovetail is not entirely obvious, particularly with the threat of winding up for schemes deemed to be offering persistently poor outcomes for savers,” says Gareth Henty, pensions market and services leader at PwC. But the message to the pensions industry was nonetheless clear: sort it out, or else.

Critics might argue that pensions are supposed to be invested in the financial best interests of clients; if those interests are served by investing overseas, shouldn’t they be doing that?

Pensions expert Tom McPhail, director of public affairs at The Lang Cat, points out that pension schemes operate under licence from the government. “There is the tax relief,” he says. “The framework is there thanks to the government so I’m kind of OK with government saying it wants more investment into the UK.”

The industry is unlikely to get much relief should Rachel Reeves move into No 11. Labour is also well aware that the economy is in desperate need of investment capital to secure the growth which is notably absent from the Office for Budgetary Responsibility’s forecasts. (UK plc is expected to deliver 0.8 per cent growth this year followed by 1.9 per cent, 2.2 per cent, 1.8 per cent, then 1.7 per cent. That is poor indeed.)

What the chancellor failed to address was how this situation was allowed to develop in the first place. In part, it is regulation that has made equities much less attractive as an asset class for pension funds, which have been focused on matching their assets to their liabilities.

But the slow growth and the lack of exciting listings on the London market make it unattractive for the limited amount of money pensions have been putting into UK shares. The returns are so much better overseas, which is where the most exciting companies are minded to go.

It is the government’s stewardship of the economy, and its failure to pay attention to the rot at the heart of the UK’s financial centre, that is to blame for all this. Not forgetting the ‘B’ word – Brexit. Hunt wouldn’t dare say that, however. Nor, these days, would Reeves.