The Fiscal Dispatch with Atticus Partners

Welcome to the Atticus Partners Financial Services newsletter: The Fiscal Dispatch.??

Once a month, we cover the topic stories relating to Financial Services (FS) in Westminster and Whitehall.??

In this edition, we look ahead to pension fund investment, Bank of England capital reforms, untapped savings, capital market investment and parliamentary activity.?

For more information about Atticus’ work in FS, or queries about the support you require, please get in touch via [email protected].???

UK pension funds’ investment in British stocks reaches an all-time low?

According to New Financial’s recent report, there has been a significant decline in the proportion of UK pension funds invested in domestic equities, currently at just 4.4% of assets, down from 6% the previous year and far below the 10.1% global average. UK pension schemes also have low allocations to private markets, with defined-contribution schemes investing merely 2% in unlisted British equities. This trend is putting pressure on the UK Government to encourage more investment in domestic assets to boost the economy.?

Chancellor Rachel Reeves has proposed reviewing the pensions industry to potentially adopt a "Canadian-style" model, which could involve consolidating the fragmented local government pension schemes. In comparison, Canadian pension funds hold only 3% of their assets in listed stocks but allocate significantly more to private equity and infrastructure. This diversification approach has led to strong returns, as demonstrated by the Canada Pension Plan Investment Board's annualised returns of 9.2% over the past decade.?

The decline in UK pension funds' investment in domestic equities is attributed to regulatory changes pushing corporate defined-benefit schemes towards bonds and other lower-risk investments. This is due to various factors, including higher returns in other asset classes, transaction costs, and a decrease in the number of companies going public, have contributed to this shift. Despite these trends, the report indicates that UK pension funds could potentially double their allocation to domestic stocks, which could inject around ￡100 billion into the market, while still aligning with international standards.?

This analysis underscores the broader economic implications of pension fund allocations and raises questions about the balance between regulatory frameworks, investment returns, and the potential benefits of investing in domestic markets.?

Bank of England delays bank capital reforms until 2026?

The Bank of England (BoE) is expected to delay the next phase of Basel III bank capital reforms until at least January 2026. This decision follows similar delays in other major jurisdictions like the US and EU, as they wait for the US to finalise its package of changes. Originally scheduled for earlier, the reforms were already delayed due to the COVID-19 pandemic, and the BoE's decision aligns with the timeline of other major jurisdictions like the EU, which have also postponed changes to avoid putting their banks at a competitive disadvantage.??

The delay is also linked to the UK's political landscape, with the calling of a general election earlier this year preventing regulators from finalising the rules in time to give banks the required notice. The Bank had aimed to announce the full package by mid-2023, but is now expected to push back the reforms as part of broader global delays in implementing the Basel III standards.?

The banking sector is likely breathing a sigh of relief, with the new regulations anticipated to impact banks' profitability while increasing capital requirements, raising concerns about a potential drop in the sector's competitiveness and its contribution to economic growth. With the immediate economic situation appearing bleak for the UK, any news which helps to boost the financial sector will be good news for the Government.?

￡430 billion in UK savings goes uninvested?

A new report from Barclays reveals that British savers have around ￡430 billion in excess cash savings, potentially missing out on better returns from investments. The research highlights that approximately 13 million adults could benefit from investing their surplus cash and suggests that regulatory changes are needed to encourage this shift. The bank's findings emphasise that many savers have more than six months' worth of income in cash, suggesting significant potential for increased investment if barriers are removed.?

Some of the barriers’ savers cited in the report include feeling overwhelmed by choice paralysis, with 21% citing insufficient knowledge and 24% finding investing too complicated. Additionally, 74% want guidance on the best investment options and 63% seek help in comparing products, while 43% avoid investing due to fears of high risk and potential loss.?

In response, the Financial Conduct Authority (FCA) is considering regulatory adjustments to simplify access to financial guidance and investment advice. Proposed changes include allowing companies to offer targeted support without upfront fees and enabling simplified advice for smaller investments. Barclays has recommended regulatory reforms to reduce paperwork and make investment products easier to compare, aiming to bridge the investment gap and boost the UK capital markets. The FCA plans to outline its next steps in creating a more accessible and affordable advice framework for consumers.?

UK Capital Markets Need Urgent Overhaul to Attract ￡1 Trillion Investment, Wilson Report Suggests?

A recent report by Sir Nigel Wilson, chair of Canary Wharf Group, has called for an urgent revamp of the UK's capital markets to secure ￡1 trillion in investment over the next decade. The report warns that the UK has been falling behind the US since the global financial crisis, with sluggish economic growth, political instability, and waning investor interest in domestic publicly listed companies.?

Wilson argues that the UK needs a strategic shift in its tax and regulatory frameworks to foster a "home bias" in investments. By aligning with practices seen in countries like France, Sweden, and the US, which leverage their tax and pension systems to promote domestic investment, the UK could stimulate much-needed capital flows into its economy. Key recommendations include pension tax incentives for investing in UK firms and reducing stamp duty on UK stock transactions, which currently penalises domestic investments compared to foreign counterparts.?

The report’s emphasis on moving towards a "risk-on" approach could be a game-changer. The UK has been overly cautious since the 2008 crisis, and embracing higher-risk, higher-reward opportunities could unlock significant growth potential. Wilson estimates that ￡100 billion in new capital is needed annually to fund critical sectors like housing, infrastructure, renewable energy, and tech, setting the stage for a potential 3% annual economic growth rate.?

Importantly, Wilson also points out the need for the UK to revitalise both public and private markets to attract top financial start-ups. The challenge lies in making UK listings attractive enough for companies like Revolut and Monzo, which have so far opted to stay private due to unfavourable listing conditions. Closing the gap in governance and disclosure requirements between public and private markets could be pivotal in restoring the UK's capital market appeal and driving long-term economic prosperity.?

House of Lords calls for tough decisions to be made on national debt?

The House of Lords Economic Affairs Committee has criticised the UK’s current central public debt rule, calling it too lenient and prone to manipulation, suggesting it gives a misleading picture of the Government's financial health. They recommend a new fiscal framework that ensures the ratio of public debt to GDP decreases over a five-year period, to address concerns over the existing rule's credibility and effectiveness. In particular, the Committee said that “rather than have a continually moving target to reduce debt, the framework should set out how debt as a proportion of GDP will be lower on a given date in the fifth year, unless there are exceptional reasons. To provide accountability, the target for the fifth year should remain fixed until reached.”?

Lord Bridges of Headingly, Chair of the Committee, claimed that the peers were raising the “red flag” for the Government and that the national debt was on an “unsustainable path.” Whilst the Government would hardly have been ecstatic with the contents of the report, it was welcomed by Government figures. Darren Jones MP, Chief Secretary to the Treasury, remarked that the report showed the “dire state of the country’s finances” and said it justified the “tough decisions” that were being taken to “fix the foundations of our economy.”??

The tough choices the Treasury have made so far in regard to the Budget have exacted a toll on the new Government, yet the report may provide them with additional justification to stay the course with the upcoming painful budget. If the Lords Committee’s report is accurate, there may be more fiscal discomfort the Government has currently experienced, may only be the beginning.?

For more information about Atticus’ work in FS, or queries about the support you require, please get in touch via [email protected].