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An influential financial think-tank has called on the UK government to amend a bill to force workplace pension default funds to invest more in UK equities, proposing an allocation that could drive more than £75bn into British stocks by the end of the decade.
New Financial said on Thursday that there is a “window of opportunity” for the government to create UK-weighted default funds across the defined contribution (DC) pension system, suggesting a target domestic allocation of 20 to 25 per cent of all equity holdings, up from a current level of less than 9 per cent.
British pension funds have rapidly moved away from UK equities in recent years, with DC fund allocation to UK stocks falling from more than 40 per cent of total equities in 2013 to 9 per cent by 2023.
“Vibrant public equity markets are crucial for the health of the UK economy, and a strong domestic base of pension funds really matters for UK equity markets,” said William Wright, founder of New Financial.
He added that a threshold of at least 20 per cent UK allocation to the equity portion of default funds would have a “very significant impact and better reflect most people’s view of where they want their pension invested”.
According to a survey of 1,000 Britons carried out by H/Advisers for New Financial, two-thirds of respondents said the government should encourage UK pension funds to invest more in British companies.
On average, those surveyed thought that about 40 per cent of their pension was invested in the UK stock market, compared with only around 7 per cent in reality.
DC pensions in the UK currently hold about £33bn in UK-listed equities, according to New Financial. This could rise to around £109bn if UK equities represented 19 per cent of all equities in pension default funds, which are designed to meet the needs of the average member. This would rise to £128bn if the government went one step further and forced all DC pension funds to invest a fifth of all stocks in the UK.
So far, the government’s focus has been on driving more investment into domestic infrastructure and private equity, after coordinating a voluntary accord under which 17 of the largest DC pension providers committed to invest at least 5 per cent of their default funds in UK private markets.
The previous Conservative government announced plans to launch a “British Isa” — an additional £5,000 tax-free savings allowance specifically for investing in UK equities — but this was scrapped by the Labour government last year following concerns over complexity.
Proposed so-called “mandation” of pension funds into UK assets has faced fierce resistance in recent months due to the fiduciary duty of pension funds managers and trustees to invest in the best interest of their members.
US stocks raced ahead of their UK counterparts during the past decade. The S&P 500 index was up 300 per cent, compared with 120 per cent for the FTSE 100, in local currency terms. However, UK stocks have gained 16 per cent since the start of January this year, compared with 13 per cent for the US equivalent.
A pensions bill, expected to become law next year, sets a framework to allow regulators to force default funds of workplace DC schemes to invest in specific assets, including private equity, private debt, venture capital or property, but not in listed equities.
However, Wright said New Financial’s proposal would not force any individual to invest more in UK equities, as they would be given the option to opt out of the default funds.
New Financial said a more dynamic stock market would enable more UK companies to raise greater sums of capital to invest in jobs and growth and provide a funding continuum for high-growth and tech firms to scale up and stay in the UK.