Before he became a front bench MP Kwasi Kwarteng wrote a readable account of empires entitled War and Gold, which could become an appropriately titled metaphor for his first mini budget.
With the mini budget, the chancellor divided an excited commentariat, but for institutional investors and pensions funds there were parts that could prove to be gold, even if the initial market response was one of being clearly spooked.
Kwarteng announced plans to introduce a ‘Long-Term Investment for Technology & Science’ (LIFTS) competition, providing around £500m of support to new funds that specifically target investment from pensions and other schemes into the UK’s science and technology industry.
He said the competition would “unlock billions of pounds of additional investment into UK scale-ups over time”. A grand and ambitious set of numbers, but could it work?
Carolyn Saunders, a partner at Pinsent Masons, said this could indeed lead to real benefits, especially on the environmental front. “Encouraging pension schemes to invest in funds supporting science and technology could help to accelerate the development of new products and solutions to combat climate change.”
And she added: “Assuming the funds are sufficiently robust and appropriately designed, pension schemes should find these climate change opportunities attractive, not least because the stories attached to them will play out well with members.”
Supporting innovation
Chris Cummings, chief executive of the Investment Association, agreed that this was a welcome and a positive move. “Initiatives to boost investment in science and technology firms will also help support innovation and growth.”
In addition, the creation of low-tax investment zones could offer investors new infrastructure investment opportunities. The chancellor announced investors will get a full stamp duty land tax cut on commercial buildings bought for use or development and purchases of land or buildings used for residential development.
This could be seen as an expansion of Boris Johnson’s Levelling Up programme, and whether institutional investors play a part will be interesting.
Investors and pension funds contacted for this piece in regards to this announcement did not wish to comment, which could be viewed as telling in itself.
Opening the flood gates?
A more upbeat outlook can ascertained from the much-discussed changes to the pensions charge cap, which are finally to become a reality, Kwarteng announced.
This means defined contribution (DC) charge cap performance fees will be scrapped and such schemes will be open to invest in a wider range of assets than ever before.
Chris Cummings approved of the announcement. “We specifically welcome the pensions charge cap reforms, which will enable investment into a wider range of assets, such as infrastructure projects and property.”
But Pinsent Masons’ Saunders warned the move was not a ‘silver bullet’. “The government has long seen removing the cap on performance fees as the key to unlocking defined contribution scheme investment in productive finance. While this may help some schemes, there are many other factors that can discourage schemes from investing in this way, so this alone is unlikely to be the silver bullet,” she said.
A point shared by Stephen Budge, partner at Lane Clark & Peacock. “While we welcome the progress being made, making it easier for DC pension savers and pension funds to access illiquid asset classes, we are not convinced these steps will necessarily open the flood gates on their own,” he said.
Getting the jitters
Looking at the investor outlook from the market reaction to the mini budget, the picture is fraught. With Britain borrowing heavily to go for growth – borrowing £70bn this financial year – the markets have become very jittery, very fast.
This was evident in two market responses: the pound dropping to a 37-year low against the dollar as soon as Kwarteng sat down and the yield on UK five-year bonds shooting up 57 basis points to stand at 4.5% on the first full trading day following the mini budget.
The fall and fall of the pound is a worrying trend. It suggests investors see sterling as a risky asset. Since the start of August it has dropped by 10% – and the value of sterling is more than a fifth lower than it was a year ago.
It should be noted that the euro has also fallen 15% against the dollar over a similar timeframe.
On the bonds outlook, with about 30% of the UK gilt market being held by overseas investors one commentator noted that it was going to be US and European pensioners who will pay the price.
All in all, it could be viewed as market disapproval of the £45bn worth of tax cuts and the big borrowing Kwarteng announced. More troublingly, it could be an indication that markets are now bunkering down for recession.
Alternatively, it could be a temporary shock to what was quite a radical mini budget.
Over the coming weeks and months the picture will become clearer. The market situation currently though remains extremely tense and uncertain.
Looking beyond the current headlines, Paul Johnson, director of the Institute for Fiscal Studies, a think tank, said: “This is a huge economic experiment which carries with it lots of risks as well as, we hope, the potential upside in terms of economic growth.”
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