Wide-ranging reforms to the pension system to "turbocharge" consolidation and concentrate ownership, rather than solely to provide financing, are needed to encourage greater investment in the UK economy, a report from Resolution Foundation has argued.

The think tank’s report, Beyond Boosterism, argued that the UK is a "low investment nation", estimating that if UK business investment had matched the average of France, Germany and the US since 2008, GDP would be nearly 4 per cent higher today.

However, the report said that corporation tax cuts and a return to policy stability, while important, will not be sufficient to bring about the new investment ecosystem needed.

Instead, it argued that wide-ranging reforms to the pension system and corporate governance are needed to focus firms’ managers on long-term value, boosting their willingness to invest.

Although the report acknowledged that there is an active debate in the UK about how best to encourage pension funds to return to UK listed shares, it found that there is little evidence that the lack of finance is a major barrier to investment among established firms.

Instead, it said that pension reform should be considered as a route to raising investment levels by rebuilding concentrated firm ownership, arguing that structural and regulatory forces in the pensions system have weakened the engagement of UK firms’ owners’ over the past two decades.

Indeed, the report showed that private defined benefit (DB) pension schemes, formerly the anchor investors in the UK stock market, have largely vacated it, revealing that defined contribution (DC) and DB pension funds in aggregate now allocate only 2 per cent of their assets to directly held UK equities.

In light of these concerns, the think tank encouraged policymakers to consider each strand of the pension landscape separately, with the common objective of developing a pension funds ecosystem that not only holds more UK equities, but does so via far larger funds able to provide more concentrated – and therefore engaged – ownership.

In particular, it recommended that the government facilitate consolidation in the DB space by completing the legislative regime around pension ‘superfunds’ and, "more radically", expanding the remit of the Pension Protection Fund (PPF) to act as a state consolidation option for solvent pension schemes, providing an alternative to buyout.

In relation to the DC space, the report encouraged the government to set stringent value-for-money tests, as well as mandate schemes that fail them to transfer assets to a number of authorised multi-employer DC pension trusts, aiming to cut the number of funds by 90 per cent.

As part of this, the foundation said that the government should target for there to be fewer than 250 non-micro DC funds by the end of the decade, pointing out that this would still be double the number of funds in the Australian system today.

It also encouraged the government to consolidate the £300bn of Local Government Pension Scheme (LGPS) assets, currently spread over around 100 funds, into one.

The think tank argued that these reforms will help drive scale in the active pension market and will over the medium term create a set of large funds able to act as blockholders of UK firms and to invest directly in unlisted, productive assets.

"The result would be a pensions industry that looks more like those in Australia or Canada than today – remaining in private hands, making its own decisions about which assets to invest in, but delivering lower costs and with the scale that makes owning and actively managing significant chunks of UK firms feasible," it stated.

"This would deliver at least as good outcomes for savers and, crucially, significantly better outcomes for the UK economy as a whole."

In addition to this, the report argued that the British Business Bank should be allowed to borrow on the markets with a government guarantee, and offer a co-investment fund which would allow pension funds to invest as a limited partner alongside it, piggy-backing on its expertise.

The report also argued that, to help finance higher investment, the government should consider a phased increase in the minimum savings rate within auto-enrolment, by increasing the minimum contributions by both employers and employees to 6 percentage points.

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