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In a week where our friends across the Atlantic were grappling with trust in institutions, Chancellor Rachel Reeves used her first Mansion House speech to outline a policy platform focused on building a new type of UK institution.
Her late-night speech will have very little immediate impact – but she is walking a well-trodden path by her forerunners in Canada and Australia. If she gets the implementation right, Reeves’ reforms have the potential to launch a wave of private capital investment all while redefining the retirement outcomes for millions of workers.
After the reception her first budget received, you’d be forgiven for thinking the Chancellor would use her first outing at Mansion House to woo the movers and shakers of the Square Mile with a routine run down of her commitments a fortnight earlier. Instead, in an indication of her resolve, the Chancellor opted to serve up a further course of reforms.
Amongst a series of stern letters, revised remits and consultations was a plan to create Canadian and Australian style megafunds – pooling the funds of local pensions schemes with a view to deploying their funds en masse into renewing UK Plc. The idea is simple - pool the funds, defray the risk and seek greater returns beyond gilts and standard equity holdings. The Chancellor believes this could unlock £80bn of investment.
But her reforms – which former Tory Chancellor George Osborne said last week built on his own pensions shake up a decade ago - are far from perfect. We won’t see a mandate to invest in UK assets and Reeves remains wedded to a very British preference for competition (see also: rail franchises) by having eight separate funds rather than one single pool. Reeves has one shot at these reforms and history has showed that bit-part and voluntary approaches really haven’t shifted the needle effectively.
The Chancellor was quick to point out that Australian pension schemes invest around three times more in infrastructure investment compared to the UK and 10 times more in private equity. But the fundamental challenge she faces is having projects to invest in. Already, this Government has taken steps to delay decisions in the likes of the Lower Thames Crossing, Hinckley National Rail Freight interchange and Luton airport. Most crucially, the desperately needed reforms to the planning system are yet to be released. While it remains early days the Government has its work cut out to ensure its actions are consistently pointing in the same direction.
The challenge for Reeves and her team will be to translate the prospect of radical gains in prosperity over the longer term into short-term electoral success. The enticing prospect of higher retirement savings in several decades time rings hollow when cost-of-living pressures are in the here and now. Voters were promised growth, and judgement will be cast on their performance in four and half years-time.
While the Australian and Canadian systems have unleashed a wave of investment, it’s taken the better part of four decades to get there. And as increasingly hungry beasts, these funds are increasingly discerning in their investments. No longer will middling returns suffice. For Reeves’ reform to succeed, she’ll need to ensure Whitehall can deliver a steady supply of good-quality projects and an investment environment to match.
The challenge for Reeves is clear – how does a Chancellor bring to life billions of dollars of funds that are happily ticking over – without making it a paradise for fly-by-night operators and creating new forms of financial risk?
The risks of getting these frameworks wrong is shown in the more than 300 PFI contracts set to expire over the next ten years. The UK is now left with the consequences of prioritising exotic accounting treatments and the illusory promise of getting something for nothing. Original proponents have long gone and the assets the state will inherit are in a far poorer condition than any Treasury official would have promised.
Reeves must be congratulated for taking the long view. Partnerships and commercial arrangements with the private sector are desperately needed to renew the UK’s crumbling infrastructure but there are plenty of lessons to be learned from our previous follies.