UK Funds Risk Tax Hit for Underinvesting at Home, Official Warns

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(Bloomberg) — The UK could claw back pension tax breaks from asset managers who fail to invest adequately domestically, the UK’s chief business bank said in a warning about the risks the industry faces as the government pursues a major growth initiative. .

Lewis Taylor, a de facto government official in his role as chief executive of the state-owned bank, insisted he did not support the idea but pointed out how the government could boost financing for growth-enhancing projects at no cost to taxpayers and without resorting to outright coercion. Australian Investment Stimulus.

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Prime Minister Keir Starmer is counting on the private sector to deliver the faster growth promised by his new Labor administration. Funds deemed to invest too little in the UK are under scrutiny because they already make significant gains from tax relief on workers’ pension contributions, boosting assets under management.

So far, the government has stopped short of setting minimum allocations to assets in the UK, but Pensions Secretary Emma Reynolds this week refused to rule out taking further tough action.

“We’re not talking about that right now, but let’s see where we get to,” Reynolds told the Financial Times when asked about the controversial delegation move. “Pension investing, as you know, is very generously provided in terms of tax relief.”

In an interview with Bloomberg before Reynolds’ comments were published, Taylor said that instead of offering additional tax breaks, the government could instead strip the money of some of the benefits it currently receives.

“It is open to the Treasury to say, ‘Unless your scheme invests some proportion in the UK, we will get back the tax benefits you got. You can get them back from the pension plan.’ “That would be financially positive for the Treasury – meaning the deduction happens on any Yes, but anything they demand is positive.”

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Pension contributions are deducted from pre-tax profits, a subsidy worth about 50 billion pounds ($63 billion) annually at a time when public finances are under severe pressure. For basic rate taxpayers, this amount represents a 20% exemption on contributions and 45% for higher rate taxpayers. A tax on pension funds that invest less in the UK would not amount to a mandate, because they can still invest abroad if they see that doing so outweighs the cost of higher tax.

Starmer pledged to achieve sustainable growth of 2.5% annually and improve living standards, a challenge for an economy suffering from almost stagnant productivity since the global financial crisis of 2008-2009. This malaise is widely blamed on chronic underinvestment in infrastructure and startups.

Ministers would like pension funds to commit at least 5% of their assets to the UK, and hope the disclosure regime will be sufficient to ensure this is achieved voluntarily. Taylor said the threat of clawbacks could encourage infrastructure investment and venture capital, but could also damage the UK’s “reputation among international investors in the open economy where there is a lot of freedom”.

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He added: “This is difficult for the government. There are no easy answers here. It should be completely gradual. But it has the potential to change the growth rate of the economy. Venture capital requires a little patience, infrastructure investing requires some patience, and retirement money is patient capital.

BBB, an independently managed development bank to help small and medium-sized enterprises, has £7.9 billion to co-invest with private sector partners. It also manages government loan guarantees and a COVID emergency business loan portfolio, including a small business bounce-back loan scheme.

For now, the government is moving cautiously. Last week, Chancellor of the Exchequer Rachel Reeves promised new laws to consolidate the UK’s fragmented pension fund industry into fewer and larger players who have the scale to invest in bigger projects and riskier scale companies. It hopes the move will unlock £80bn of productive capital for domestic investment. In an interview with Bloomberg TV, she said that the government “is not looking at delegating pension funds.”

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Taylor said UK pension funds were performing worse than funds in the US, Canada and Australia because they were managed in a “deeply risk-averse way”. Canadian funds invest 15 times more in private equity and emerging venture capital firms than their UK counterparts and offer better returns for scheme members, according to a BBB analysis.

“We have the second-largest pool of retirement funds in the world, and it is not invested in productive assets in our economy,” Taylor said. “You have to want to put more weight in the UK, because it’s a disproportionately strong innovation ecosystem.” UK pension funds allocate just 4.4% to UK stocks, compared to 50% at the turn of the millennium, according to think tank New Finance.

Taylor claimed that not all investors oppose the mandate. Custodians face strict oversight of fees that push funds toward safer and cheaper asset classes to manage. “Some feel that if they are mandated, the question of whether or not they will get into venture capital is taken away. It’s just the way they get into it. They may feel that this would be a good thing. Others may feel that this is outrageous,” he said. What I want to invest in.”

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