Mansion House Compact: The answer to unlocking £50bn of SME investment?
The Local Government Pension Scheme offers a tremendous opportunity for investment in UK businesses, which would drive growth and create new jobs. But do we have the political will, asks Phil Woolas
The Chancellor should be praised by left and right alike for his efforts to boost investment in UK plc by our pension funds. Yet more than 30 years involvement in the Local Government Pension Scheme as Minister responsible and as trade union steward, tells me that politicians interfering with investment mandates will more than scare the horses. We have in our country an unwritten law, adhered to by Labour and Conservative councillors alike, that “you cannot play politics with peoples’ pensions” – especially if those pensioners are your own workforce.
The Local Government Pension Scheme is one of the largest funds in the UK, with its value measured in the hundreds of billions. Invested around the globe, in recent years there has been an increasing emphasis on the desirability of these investments being used to support growth and jobs in British businesses. Back in 1990 when the GMB trade union established the principle that your pension is deferred earnings and is not the property of the employers, UK occupational pensions funds accounted for about 2/3rds of all shares listed in London. Today that figure is just 2%.
So, the Mansion House speech and the forthcoming regulatory changes are to be welcomed. But, if Large Government Pension Fund (LGPF) trustees and investment managers believe they are being mandated to pick an asset class, whether the figure is 5% or another, there will be an awful backlash. The Chancellor is wise, therefore, not to go down that route for this reason alone. Yet without compulsion, will anything change?
It is expected that the result of this signalling will be a series of consultations aimed at encouraging rather than compelling schemes to use investment funds here in the UK. There is a risk that these signals will be interpreted as kicking the can down the line and something to action in the future, rather than in the here and now. This would come at a time when business lending is being choked by cautious lenders and unaffordable or poor terms.
Watching carefully is Labour’s policy unit, which is thought to want to go much further in using the incredible resources the pension funds have at their disposal, to invest in high growth-potential UK companies. With hundreds of billions of pounds at their disposal, even a bump to just 5% of funds value being invested to drive growth here in the UK would, it is argued, revolutionise the funding landscape, drive new growth and create tens of thousands of jobs.
With traditional business lending routes being squeezed post-covid, the need for a more enlightened and meaningful policy intervention is more acute now than ever. We don’t even have to look too far to find the proof of concept.
My favourite Local Government Pension Fund Chair was a postman from Tameside in Manchester. The late Councillor Kieran Quinn led Tameside Council and chaired the Greater Manchester Pension Fund with upwards of £22billion in assets. The last time we met was at the Conservative Conference in Birmingham (Kieran sadly passed away aged 57 in 2017), where he was attending to gain support for his investment strategies. Of the many initiatives he implemented, one was to establish a fund for growth businesses. Helped by the Smith Institute and LGPS experts who urged governments to “nudge rather than lecture”, along with Merseyside, West Yorkshire and West Midlands, Kieran helped to establish a growth fund with an original multi-million allocation. Since then, the firm managing this fund – now known as Growth Lending Ltd – has invested more than £500million in SME growth companies, creating more than 1,200 high quality jobs. More than 70% of those jobs are outside of the South East.
In other words, the LGPFs have been doing Levelling Up for years, without the need for mandating.
But we need to do a lot more. The Tony Blair Institute and the Chancellor are right in their urging a greater amount of inward investment from our own savings. The debate should not be diverted by calls for greater pooling, nor risk controversy by fears of central direction.
It does however, require political will and leadership at fund level. This requires a change in mandate to advisors who, all too often, rule out indigenous investment as too limited. GMPF has shown that this is not necessarily the case and, handled wisely, can result in housing and infrastructure investment and SME growth funding.
Figures from the Bank of England show that retail bank lending to SMEs post-pandemic has fallen off the cliff and just as the Big Growth Fund proved post 2008, we can, and I believe must, shift priorities. Our economic growth only comes from SMEs.
I hope the City of London Mayor Nick Lyons is successful in putting together his deal and he can follow the postman from Ashton.
Phil Woolas was Minister of State for Local Government, 2005-2007 and is a co-founder of Wellington Street Partners, a tri-partite political risk advisory company.