A recent report, spearheaded by Sir Nigel Wilson, former head of Legal & General, concludes that the UK must harness its domestic pension funds and transform its capital markets to secure the £1 trillion investment needed to achieve a targeted three per cent growth rate over the next decade.
Wilson’s analysis, which formed part of a government initiative aimed at revitalising the City, reveals that the UK needs to attract £100 billion annually over the next ten years. However, the report underscores that British markets have been hindered by a pervasive ‘risk-off’ culture, which has significantly reduced investment from top institutions and the British public.
Homegrown firms currently receive minimal investment from large UK institutions, according to Wilson. Additionally, retail share ownership among UK households has dropped by half over the past twenty years, necessitating efforts to encourage average individuals back into the stock market. Wilson stated, ‘There is a significant amount of dry powder that could be put to better use.’
The analysis, conducted by Wilson alongside notable City figures including capital markets lawyer Mark Austin, represents the latest endeavours within the Square Mile to rejuvenate its IPO market, which has seen a decline in listings over the past two years. This situation has been exacerbated by inflation and interest rate hikes, impacting the initial public offering (IPO) market worldwide, with London particularly affected.
In 2023, only 23 companies chose to list in London, a 49 per cent decrease from the 45 listings in 2022, marking the quietest year since the financial crisis. Wilson commented on the unprecedented volume of money available globally and stressed the need for the UK to attract investment from individual and institutional investors to mitigate this trend. He highlighted that the UK has £6 trillion of long-term capital within its pension and insurance sectors ready for deployment in growth opportunities.
Mark Austin remarked to City AM that the recommendations are part of an ‘ongoing journey’ to restore London’s capital markets to a robust state. City minister, Tulip Siddiq, noted that when markets perform well, the economy benefits. She cited that over £20 billion of equity capital has been raised in London this year alone, more than three times the amount raised in the next three European exchanges combined, aiding businesses in investment and innovation.
However, the UK’s pension funds lag behind their international counterparts in domestic investment. The report was released as key City and government figures gathered at the London Stock Exchange to discuss the state of UK markets. The meeting, chaired by Julia Hoggett, CEO of the London Stock Exchange, focused on strategies to boost domestic pension fund investments in listed equities and foster a culture of risk-taking.
A think tank associated with the group highlighted the challenges, noting that UK pensions rank near the bottom compared to 12 other developed pension systems in terms of allocation to domestic equities. The percentage of assets UK pension funds allocate to UK equities has plummeted to 4.4 per cent, down from 6.1 per cent last year and significantly lower than over half their assets 25 years ago.
The comprehensive analysis urges the UK to capitalise on its substantial domestic capital reserves and reform its capital markets to secure essential investments for sustained economic growth. As discussions continue, the focus remains on reversing the declining trend in domestic equity investments and revitalising the City to match global competitors.