Reforming pensions would make us less in hock to China – here’s how
A darker and little-reported backdrop to Chancellor Rachel Reeves’s visit to China last week raises questions of where we should be placing our priorities and bets to boost the UK’s economic growth.
Shortly before Reeves’s trip, Gao Shanwen, a prominent Chinese economist who dared question the sustainability of China’s growth model, simply disappeared, sending a chilling message about the state of the world’s second largest economy.
Gao’s apparent detention followed his suggestion that China’s era of rapid growth – which underpins the Communist Party’s legitimacy – was coming to an end. President Xi Jinping’s increasing paranoia about criticism may reveal a deeper truth about the country’s fundamental challenges.
A property crisis, a related and serious debt crisis with steadily rising debt to GDP, declining foreign investment and demographic headwinds that threaten to make it old before it ever gets rich – an amplified version of the classic “middle-income trap” – were a long way off when others reached out more than a decade ago.
Advocating the same strategy under Xi that looked reasonable under Hu Jintao misses the shift to Marxist nationalism that former Australian prime minister Kevin Rudd has warned about. It fails to recognise the national security implications that have seen a rare moment of unanimity on the US Supreme Court as it upholds the ban on TikTok. That’s what made Reeves’s visit to China last week so unlikely to succeed. The £90 billion trade we have with China is important, but securing just £600 million for the UK economy over five years has told us something else: we need to do better at sourcing investment at home.
Since 2001, we have been badly behind our peers. Britain’s stock market value relative to GDP has dropped by 30 per cent, while others in Australia, Canada, France, Germany and the US have, on average, increased by more than 50 per cent. This decline reflects a broader pattern of selling off strategic assets and failing to capture the value of homegrown innovations.
If we had just kept pace with these nations, the stock market would be worth £5.5 trillion today, rather than £2.5 trillion. That’s not just a loss of capital, it’s a loss of control.
Just look at the cases of ARM Holdings and DeepMind, two British technology champions that are now foreign-owned. Let’s be clear: both have outstanding leaders who didn’t make bad decisions – they made the only decisions they could. But that’s all the more telling. Despite their positions as market leaders, the UK capital wasn’t there. Facing losing ideas and people to rivals, they elected to keep the firms together by raising money abroad.
That even such extraordinary leaders couldn’t find a better solution shows the depth of the problem. Fast-growing tech innovators are being held back not by regulation in their own field, but by rules governing pensions – leaving them unable to serve the wider economy.
To understand how we got here, we need to look back to the early 2000s. Policy changes prompted UK pension funds to move money away from holdings in listed UK companies and instead into bonds, triggering an unprecedented sale of great British companies. This switch from live money – the money that supports ideas, hires teams and changes the future – to dead money – the loans made to the state – are a soft nationalisation that has drained our pools of finance and seen us sell the golden geese.
The contrast with Australia is instructive. The Australian “super” system, mandating significant pension contributions, has created massive domestic investment pools. But even Australia’s experience shows that having capital isn’t enough; it needs to be deployed with the right time horizon. Australian super funds, while better capitalised than their British counterparts, sometimes face pressure for short-term performance that can conflict with the longer-term needs of developing technology companies.
Consider the story of CSL, the Australian biotech giant. In its early days, patient capital from Australian institutions gave it time to develop its technologies. Today, CSL is a global leader in blood plasma products, worth more than 100 billion Australian dollars. This success story shows what’s possible when domestic institutional investors take a long view.
For us, there is an alternative. Proposals such as those set out in a report last year for the Tony Blair Institute have illustrated the benefits of enlarging the Pension Protection Fund (PPF) to global scale by extending its role as the natural consolidation vehicle for the UK’s thousands of small, fragmented defined benefit pension schemes. These funds are at present mostly invested in gilts and therefore are simply “dead money” when it comes to funding growth and innovation. The PPF also has a long and proven track record of superior returns generated by a best-in-class investment team.
The beauty of pension fund capital lies in its natural alignment with national economic development. It is the wealth of the old fuelling the ideas of the young and the energy of the young supporting the retirement of the old. Unlike foreign strategic investors who might prioritise technology transfer or market access, pension funds succeed when the broader economy succeeds. Their multi-decade investment horizons match perfectly with the development cycles of advanced technology companies.
This isn’t about protectionism or closing Britain to foreign investment – we must stay open, but with open eyes. Instead of betting again on the policies of the past or looking at asset sales as the solution, we need answers closer to home so that British savers participate in British success stories.
The question isn’t whether we need reform or whether to bet on China’s debated future, it’s whether we’ll act before more DeepMinds and ARMs slip through our fingers.
Rt Hon Tom Tugendhat MP served as security minister