The UK equity market, as Prof John Kay rightly points out in his review 'UK Markets and Long-term Decision Making', is no longer majority-owned by UK pension funds and insurers, and has not been for a long time.
UK pension funds have diversified away from UK equities for sound reasons over the past decade and more, and away from equities per se as their liabilities have matured, DB pension funds have closed and funds seek to match cashflows with liabilities using derivatives and fixed income investments.
If long-term behaviour is to be promoted in equity markets, equity markets will need long-term investors. Who will those long-term equity investors be?
Solvency II means insurers are already out of the picture as major equity investors. Since DB funds are de-risking and regulation is pushing them away from equities in turn, the new generation of DC pension funds - NEST and the 'nestling' auto-enrolment structures set up to compete with it - will, in time, emerge as leading domestic equity investors.
NEST takes seriously its responsibilities as a long-term investor. Fine if it emerges as the biggest UK DC scheme under auto-enrolment. But it is by no means a given that it will take the leading market share. Employers may prefer contract-based arrangements based on underlying mutual funds and with no over-arching governance framework that is recognisable as a pension fund in the traditional sense. Mutual funds and their asset managers are far less likely to engage with investee companies than trust-based pension funds.
There is evidence that some sovereign wealth funds are taking corporate governance more seriously. But they have been afraid of being labelled activist by protectionist attitudes and were startled by the furore over Dubai World's planned takeover of P&O in 2006.
Perhaps the easiest place to start will be with continental European pension funds,
many of which are large-scale investors in UK equities and in many cases share the driving sentiments behind the Kay review. Our September Off the Record quick poll of 34 European pension funds provides an interesting first reaction to some of Kay's suggestions. A majority even saw the need for a Kay-style review in their own country.
Kay's proposed institutional investor committee should be seen as a the first step towards greater multilateral and international co-ordination. It will need to engage with a new generation of DC pension providers, as well as with global pension and sovereign wealth funds if there is to be a working consensus underpinning the Kay recommendations. Many of tomorrow's long-term capitalists will not be the same ones as today's.