17-05-2025
Reeves is fiddling with Isas while Rome burns
Your country needs you, said Lord Kitchener's infamous recruitment poster for the Great War. Today, your country wants you to risk not your life, but your savings.
We live in an age of economic nationalism, with the pendulum swinging decisively away from the globalist trends of recent decades towards a more inward-looking approach to economic management.
It should therefore come as no surprise that the Starmer Government wants to marshal more of the nation's savings to the purpose of specifically British investment.
Everyone else does it. Most countries channel a much greater proportion of their savings resources into domestic enterprise than we manage, so why should the UK remain the odd one out?
I'll tell you why in a moment. But first a little background.
As regular readers of this column will know – I have written about it often enough – low levels of investment are a key economic weakness for the UK. Relative to most other major economies, we consume too much and we save and invest too little.
We are particularly poor when it comes to investing in our own country, preferring instead the seemingly higher returns offered by overseas markets – especially the US.
If Britain is ever to throw off its productivity slough, it needs to be investing a lot more in its future.
For the moment, we are stuck in a self-reinforcing doom-loop of decline, where low levels of investment feed into weak productivity growth, which in turn makes the UK an even less attractive place to invest.
Frog-marching British savers into investing in UK plc is a key objective for Rachel Reeves, the Chancellor, and it comes in two different forms.
One is to strong-arm pension funds into committing a defined minimum of their assets to unlisted, UK equity investment.
The other is to either cut the amount of cash that can be invested in individual savings accounts (Isas) – or to abolish cash Isas entirely – in the hope that this might force savers to invest in UK equities instead.
This second line of attack also has an ulterior motive, in that it would remove at least some part of the tax shelter cash Isas provide, and will therefore mean that more of the interest earned from holding cash will get taxed.
Last week brought some progress in the first of these two approaches.
Thanks in part to the intermediation of Alastair King, 17 of the City's biggest defined contribution pension providers have been persuaded to commit at least 10pc of their default funds to unlisted investment – of which at least a half will be in UK unlisted securities.
They had to be dragged kicking and screaming into agreeing, with the threat of making it mandatory still hanging like a sword of Damocles above their heads should they fall short.
But let's not be curmudgeonly about it. Cajoling companies as big as Aviva and Legal & General to lay aside their concerns over breach of fiduciary duty is a significant achievement.
Sadly, it's also hardly transformational. Total pension fund assets within the scope of this new, so-called Mansion House Accord, amount to £252bn – leaving the sums to be devoted to the sort of UK infrastructure, clean energy and business start-up investment the Government wants pursued at 'just' £12.5bn.
This is not to be sneezed at. But in the context of total UK business investment of around £300bn annually, barely touches the sides.
What's more, the far bigger pool of UK savings in now almost entirely closed final salary pension schemes is left untouched by the new accord.
That's in part because these funds are required for a still higher purpose – supporting the national debt. Indeed, these so-called defined benefit pension schemes are far and away the biggest single source of buying in the UK gilts market. Without their demand, the Government would struggle to fund itself at current interest rates.
This makes the Treasury particularly wary of meddling in the plethora of liability matching rules and regulations that force final salary pension funds to max out on government debt.
It's an unhealthily symbiotic relationship in which the one relies on the other, and in itself goes some way to explaining Britain's shamefully poor investment record.
With public indebtedness swelling from around 20pc of national income 30 years ago to 100pc today, private investment has been all but crowded out. The nation's savings have flowed into public debt instead.
What is more, in terms of improvement in the nation's productive capacity, we have virtually nothing to show for it. Nearly all the money raised has been flushed down the drain of current consumption.
In return, pension funds have received a growing mountain of Treasury IOUs. Liability for pensioner entitlements has in effect been loaded onto future generations of taxpayers.
Thanks to higher interest rates, Britain's defined benefit pension schemes mercifully find themselves back in balance once more.
It's a God-given opportunity for many of them to start investing in higher return UK equities again. But they need the Government to act to make this happen, and it seems unlikely the Treasury would want to risk such an important source of funding for the UK gilts market by forcing things.
There's so much wrong with the pensions and savings market in the UK as it stands that it's hard to know where to start. Getting back to a situation where some 40pc to 50pc of available equity investment goes into domestic equity markets, as occurs in the US and Australia, requires root and branch reform.
The voluntary half measures so far announced certainly won't do the trick. They are too timid and too beholden to vested interest – including those of the major savings institutions and the Government itself.
Plus, they put the cart before the horse. There's a good reason investors prefer overseas markets to our own, and that's because the UK is an increasingly unattractive place to invest.
By whacking up taxes on companies, and by further burdening them with much higher minimum wages and worker protections, the Government has made matters even worse.
It's entirely reasonable to expect pension and Isa savers to do more to support the domestic economy given the tax breaks they enjoy. But first there's got to be something worth investing in.
State-directed investment is rarely a sound use of money, and it is even less so when the funds are channelled into projects that would otherwise struggle to attract commercial backing.
Until the UK investment environment as a whole improves, initiatives such as the Mansion House Accord amount to just rearranging the deck chairs on the Titanic.
