The potential of workers’ capital in Britain’s economic renewal

The 2008 financial crisis and subsequent stagnation in the British economy gave renewed prominence to one of its longstanding handicaps. The relative lack of long-term investment can be associated with both the housing market and asset price booms which created significant volatility in the pre-crisis period, and with the sluggishness of the post-recession recovery which has ostensibly been underway since late 2009. Short-termism in investment practice is one of the key drivers behind Britain’s sluggish productivity growth.

Pension funds lie at the centre of this undesirable status quo. They are, to some extent, the victims of Britain’s economic short-termism. The economy (including the public sector) is not creating sufficient opportunities for long-term investment to which pension funds can allocate significant amounts of capital.

On the other hand, however, pension funds can be said to be perpetrators of chronic economic short-termism (although certainly not the main perpetrators). British pension funds are hugely significant capital-market participants. Their embrace of securitisation in the 1990s – which can be associated with responding to population ageing – had a transformative impact on investment practice in the City of London. More generally, pension funds also highly value liquidity in investment – that is, assets that can be traded quickly – and tend to trade some assets at a relatively high frequency in order to track investment benchmarks.

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