Budget pension consolidation raises ‘serious concerns’ for UK small firms

Fund managers that invest in UK small companies have “serious concerns” that plans to consolidate pension schemes might lead to even more money flowing out of British businesses.

The plan, announced at Chancellor Rachel Reeves’ inaugural Mansion House speech earlier this month, would combine 86 different local government pension schemes manage assets between £300m and £30bn into a handful of ‘megafunds’.

With local government pension schemes ob n track to collectively manage £500bn by the end of the decade, the reforms could unlock as much as £80bn in investment, Reeves claimed.

However, Richard Staveley, portfolio manager of the Rockwood Strategic Investment Trust, told City AM that he had “serious concerns” about the approach, because as pension pots get bigger, it becomes harder for them to invest in smaller listed companies in the UK.

Staveley explained: “If you go from having a £30bn fund that doesn’t have much in UK small caps to a £100bn fund… do you make 2000 investments in small British companies, or do you do a massive infrastructure project that Rachel Reeves can come and cut a red ribbon on?”

While Staveley agreed that more investment was needed in infrastructure, he warned that despite claims the plan will push investment in the UK, “that strategy isn’t necessarily helpful for small British companies”.

Other City figures investing in smaller companies have felt a similar malaise at the plan, as around £4bn has left UK smallcap funds in the last two years.

Premier Miton’s head of equities Gervais Williams recently said that the plan would effectively pull capital out of smaller UK companies, with pension funds being less likely to invest in small British businesses.

“The scale of disappointment is hard to state. This is a straight mistake. I can’t say it’s anything different,” he said.

Instead, Rockwood’s Staveley suggested three ways that the Chancellor could push investment in UK small companies, from excluding AIM shares from inheritance tax on pensions, cutting capital gains tax on AIM shares, and a reform of the ISA system.

The ISA system has been a particularly focus for UK equity investors, with rows over the British ISA and ISA simplification raging over the last year.

Ultimately, Staveley stressed: “We need incentives to help have a thriving UK stock market, and that will benefit the country.”

“If we look to America, look at their stock market, they don’t just all own Nvidia, they’ve got a very healthy stock market, and that’s clearly related to the overall vibrancy within the economy.”

“We’ve got to address it, if we let it go, and just let it be Unilever and Imperial Tobacco, a few large companies, and then super small venture capital stuff, we won’t have any kind of scaling. We’re losing the ability to scale up our interest in companies, if we’re not careful.”