Investors favour improved tax incentives for pension investment in small and mid-cap firms

More than two-thirds (67 per cent) of investors want policymakers to improve tax incentives for pension funds and insurance companies to invest in small and mid-cap companies, according to research from Peel Hunt.

The research, which was conducted with the Quoted Companies Alliance (QCA), was released in the wake of the Hill Review and showed that investors broadly supported the government and the Financial Conduct Authority taking action based on Lord Hill’s recommendations, many of which touched on the investment of pension savings.

For defined benefit schemes, the review stated that amendments to Solvency II regulations could “increase the quantum of scheme transfer” and therefore reduce some volatility and risk for listed companies, while a rethink of capital charges could allow insurers to re-direct more of the assets of schemes into equities or infrastructure investment.

For defined contribution schemes, it was recommended that changes should create a more “inclusive culture” for retail investors after the review registered support for more capital from the schemes being invested into high growth assets.

The review explained: “As part of this there was support for more diverse FTSE index inclusion, allowing investors access to innovative and high growth companies. There was also support for further transition into potentially less liquid investment strategies, given the long investment horizon of many investors.”

Overall, the document exhibited recognition of the need to improve retail investors’ access to markets given the fact that the introduction of auto-enrolment had resulted in the number of employees with exposure to capital markets rising from 10.7 million to 18.7 million between 2012 and 2018.

The review continued: “The transition from defined benefit to defined contribution pension arrangements is putting the retail investor at the heart of decisions associated with their future but also means they are carrying more of the investment risk and as such should be considered in any redrawing of the Listing Rules landscape.”

Alongside measures explicitly related to pension schemes, Peel Hunt and QCA’s research found that more than half (58 per cent) of investors asked for the tax treatment of debt and equity to be rebalanced and three-fifths (60 per cent) of companies called on regulators and policymakers to provide further incentives to increase private investors on the share register.

The research also noted that the investment community had helped to keep listed companies afloat during the pandemic, stating that active investors had injected £45.9bn of new capital into UK listed companies across 333 fundraisings that exceeded £5m in value since the first lockdown began in March 2020.

The independent review was intended to gather evidence and make recommendations to the government and UK regulators on how to encourage more high-quality UK equity listings and public offers now that the UK has more responsibility to its financial services regulations after leaving the European Union.

Peel Hunt chief executive, Steven Fine, commented: “While we are all hopeful that the recommendations in Lord Hill’s long-awaited review will turn into decisive actions, providing a shot in the arm for the UK listing regime and helping the UK regain its crown as the destination of choice for private companies seeking capital, it is only the first of many doses needed to unlock growth and heal the scars that the pandemic has left behind.”

QCA chief executive, Tim Ward, commented: “The story of the last 20 years has been about the decline of the UK’s public equity markets, and in particular a consistent shrinking of the number of small and mid-sized companies using them, preferring instead to opt for low cost debt or private equity.

“The need to stimulate our economy, combined with the opportunities that leaving the EU provides, can build momentum to revitalise the UK’s public equity markets. Lord Hill’s Review of the UK listing regime has come just in time and we hope this forms part of a well-coordinated approach from the Government that will lead to an expanding small and mid-cap ecosystem in the UK.”

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