Shunned: Most of the UK’s pension funds are turning their backs on British businesses
Back yourself or nobody else will, so the saying goes. But that doesn’t hold true within the case of Britain’s leading firms. Most of the UK’s largest pension funds are turning their backs on British businesses, investing as little as 0.3 per cent of their billions of kilos in firms listed within the UK, Wealth & Personal Finance can reveal.
Meanwhile, conversely, foreign pension funds are pouring money into UK businesses to complement their pensioners, experts warn.
The pension funds that manage the retirement savings of hundreds of thousands of retirees – including MPs, university academics, pilots and bankers – are unpatriotically shunning UK stocks.
Chancellor Jeremy Hunt has been nobly calling for more UK pension money to be poured into our country’s firms and it’s no surprise, given how little is currently invested.
Over the past 20 years, the proportion of pension assets invested in UK-listed firms has dramatically declined – falling from 53 per cent in 1997 to only 6 per cent in 2021, in accordance with the Capital Markets Industry Taskforce.
Exposure to domestic stocks has plunged further still over the past two years, falling to 4 per cent on average, think-tank the Tony Blair Institute warns.
The institute says that this inevitably has a negative effect on the UK economy. Within the space of 20 years, we have now moved from £50 in every £100 put aside to pay pensioners going towards UK equities to £4. A lot of our legacy defined profit pensions, which pay out a guaranteed income in retirement, invest even less in UK firms, we will reveal.
The Parliamentary pension scheme (The Parliamentary Contributory Pension Fund) invests just 1.7 per cent of its fund in UK-listed stocks, or 2.8 per cent of its overall quoted shareholdings, as of March 2022. Meanwhile, 59.8 per cent of its total assets (£835 million) were in listed global equities outside the UK.
The Universities Superannuation Scheme, which invests on behalf of 528,000 lecturers and academics, has a 4.4 per cent holding in listed equities.
Meanwhile, pilots working for a stalwart of British brands – British Airways – have just 0.7 per cent invested in UK-listed equities. The airline’s largest pension fund, NAPS, sold off £81 million value of investments in UK company shares between 2021 and 2022.
Alarmingly, Barclays Bank’s UK Retirement Fund invests none of its £27.2 billion in UK-listed stocks.
Even modern defined contribution workplace pensions invest astonishingly little in British firms. Such a pension is a pot of money that you simply and your employer pay into yearly and to which you’ll gain access from the age of 55.
Nest, the biggest modern workplace pension fund, which manages the retirement savings of greater than 11 million people, has just 3.88 per cent invested in UK-listed firms. Rebecca O’Connor, of pension group PensionBee, says British pensions have 17 times more invested in US stocks than in UK ones. ‘Anyone with a pension is prone to have a greater personal stake in US technology giants equivalent to Apple, Microsoft and Amazon than they’re in British firms like Marks & Spencer or Sainsbury’s.
‘Big UK firms are rarely to be seen within the list of a pension fund’s top holdings,’ she says. The Tony Blair Institute warns this has had serious consequences on the economy, because it has depressed UK firms’ valuations, constrained business investment and hampered productivity.
Jeegar Kakkad, of the group, says: ‘We usually are not backing ourselves, it’s so simple as that.
‘This country has seen the abandonment of investment within the domestic economy by UK pension funds, with the virtually total liquidation of their holdings in listed UK equities built up over generations.’ We usually are not willing to take a position in ourselves but other countries’ pension funds do put money into the UK, he adds.
‘If Canadian, American and Australian pensioners are getting wealthy off our infrastructure and entrepreneurialism, then why cannot we.’
During his Mansion House speech in July, Jeremy Hunt acknowledged the weakness. He said: ‘We have now a perverse situation by which UK institutional investors usually are not investing as much in UK high-growth firms as their international counterparts.’
Jason Hollands, of wealth manager Evelyn Partners, says: ‘Our political class, who are actually scratching their heads, mulling ways to reinvigorate the UK markets, have a hand within the situation we currently find ourselves in.
‘The City of London is a serious financial market and a big source of tax income. Large pension and insurance funds were historically a very important source of capital for British firms.’
Exactly why are we investing so little?
Gordon Brown’s infamous £5 billion-a-year dividend tax raid is partly accountable, experts say. In 1997 the Labour Chancellor abolished the tax credits that UK pension funds used to receive on UK dividends as an incentive to take a position domestically.
The move made it far less attractive to carry shares in British firms. Tough recent regulation has since added to the flight from investing in stocks. Recent rules that made pensions a more significant burden on company balance sheets within the early 2000s have forced the biggest defined profit pension funds to grow to be much more averse to risk.
A falling stock market could suddenly make the fund seem like an infinite liability and produce down your complete company, Jeegar Kakkad explains.
This implies those managing pension funds have needed to resort to supposedly safer assets equivalent to Government bonds that will not mature for at the least 15 years – where the returns are lower but are likely to be more predictable. The entire pension funds mentioned invest heavily in UK bonds and another UK assets.
‘This created an enormous shift from a portfolio that is targeted on delivering growth to at least one focused on safety,’ he says.
But previously 18 months, even these ‘safest’ of investments have threatened to wipe out pension funding.
Kakkad says: ‘What you’ve gotten seen is most defined profit pension funds making barely more aggressive investment decisions and using clever financial planning within the bonds space.’
Pension funds were pushed to the brink of disaster last October when bond prices began to fall dramatically as rates of interest rose.
Meanwhile, the stock markets – that are widely known to be more volatile typically – have proved a comparatively safer home for pension investments within the last 12 months. The Bank of England held rates of interest at 5.25 per cent last week, in a move that may cause further pain for defined profit pensions. The best way our pension funds are invested needs urgent reform, says Kakkad. ‘Enough is enough, change has to occur fast because it should make everyone richer ultimately – each pensioners and our country’s economy.
‘This is not fiddling with pension money, it’s about securing our future. In the meanwhile our pensions have been regulated to an inch of their life and it isn’t working.’
Is that this stifling the UK’S own entrepreneurs?
Britain is a hive of a few of the most effective start-up firms on this planet. A lot of these relied on funding from large pension schemes previously, Hollands says. But a scarcity of capital risks sending budding firms abroad. He says: ‘There may be a risk that increasing numbers of firms will switch over to the US markets, others will get snapped up by overseas predators because they’re low-cost as chips and younger, modern UK firms in growth industries are already deciding to list on the exchange within the US relatively than the UK where they’ll command higher valuations.’
Kakkad agrees: ‘We have now grow to be a pipeline for America, handing them incredible start-up firms. It’s a mirrored image on our system that we do not make it easy for our greatest and brightest to grow here within the UK.’
In July, the Chancellor addressed the growing risk.
He announced a voluntary agreement between a few of Britain’s biggest pension firms, including Aviva, Legal & General and Phoenix Group, to commit 5 per cent of their investments to personal equity and early-stage businesses, potentially unlocking £50 billion by 2030.
Should we funnel more into UK stocks?
When picking their very own investments for Isas and personal pensions, DIY investors are more confident in the standard of our nation’s biggest firms.
Many are likely to have a better weighting to their domestic market. The UK represents 4 per cent of world stock market indexes. Subsequently a balanced investment fund with no bias would traditionally invest this proportion of its equity investments within the UK.
John Ralfe, an independent pensions consultant, argues that pension funds would do well to stay by this rule of thumb. He says: ‘As a principle of investing, should you try to take a position your money for the best return, lowest risk and biggest degree of diversification, there is not any reason for pension funds to extend their exposure to the UK.
‘The proportion of assets invested in equities is far lower than it was 20 years ago. You’d expect not more than 4 per cent of that to be invested in UK-listed equities.’
Meanwhile, US equities make up around 70 per cent of the worldwide market indexes – and UK pension funds have responded to this by increasing their investments.
Asked concerning the Parliamentary Contributory Pension Fund’s exceptionally low level of investments in UK stocks, a spokesman for the scheme says: ‘The PCPF invests in a big selection of asset classes on a world basis.
‘Besides listed equities and gilts, the fund invests in a spread of productive assets, including a ten per cent allocation to UK properties and 10 per cent committed capital in infrastructure funds.’
Similarly, the Universities Superannuation pension fund invests a greater amount in private UK investments – at 17 per cent of all assets.
This includes investments in key infrastructure assets, wind farms and utilities, in addition to real estate and personal credit.
A spokesman at Nest says: ‘We’re on the lookout for opportunities in unlisted growth firms within the UK as a part of our private equity investing, so we will directly support British businesses.
‘Nest has one of the crucial diversified defined contribution portfolios within the UK. This helps us put money into alternative ways, equivalent to directly into UK infrastructure projects and British firms seeking to grow their business.’
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