A think tank whose backers include British asset managers and investment banks has urged the government to force defined contribution (DC) pension schemes to increase the exposure of their default funds towards UK stocks dramatically, in an effort to rescue Britain’s faltering equities market.
The report by New Financial and the Capital Markets Industry Taskforce claims that making DC workplace plans allocate between 20 and 25 per cent of all the equity investments within their default strategies towards UK companies, rather than taking “a strictly ‘global market-weighted’ approach”, would be “significantly less challenging or politically charged than mandating the asset allocation of pensions”, since workers would be able to opt out.
However, about 96 per cent of members remain in the default investment strategy, according to research by the Pensions Policy Institute.
The research suggested that raising the allocation of DC default funds to the UK would increase overall investments in London equities by up to £95 billion by the end of the decade, compared with current levels, after factoring in investment returns.
The report claimed that of the 1,000 workers saving into a pension scheme that it surveyed, two thirds of people said pensions should invest more in UK equities even if the returns might be lower than investing in other markets.
An analysis by the Department of Work and Pensions (DWP) this year found that about 40 per cent of workers, or nearly 15 million people, are already under-saving for retirement, with retired people in 2050 on course for £800, or 8 per cent, a year less private pension income than those retiring today.
The Capital Markets Industry Taskforce is chaired by Dame Julia Hoggett, chief executive of the London Stock Exchange Group, and supported by Schroders, the asset management group. New Financial’s backers include the City of London Corporation and Aberdeen, as well as American investment banks such as Goldman Sachs and Citi.
William Wright, the founder of New Financial, said that any suggestion its members had “a huge vested interest” in DC schemes being required to increase their allocation to UK equities would be “deeply inaccurate”, but declined to comment on the funding split between its almost 40 members.
A lack of demand for UK equities has led to companies being taken private and deterred private businesses from listing on the London Stock Exchange
JEFF MOORE/PA
London is facing growing questions over its relevance as a global financial centre amid a dearth of IPOs and wave of takeovers. The market’s woes are partly being driven by a lack of demand for UK equities, which has depressed valuations and led to companies being taken private and deterred private businesses from listing on the exchange.
American equity markets have significantly outperformed the UK over the past 20 years, with the FTSE 100 rising 68 per cent in value, dramatically underperforming a near-450 per cent return from the S&P 500, which has been turbocharged by US technology giants.
UK stocks currently account for just under 9 per cent of equity investments for DC pension funds, and 4.9 per cent of their overall assets, with non-UK equities accounting for 52 per cent of overall assets, according to New Financial’s analysis.
“Doing nothing” would see investment in UK equities fall to just 3.5 per cent of DC pensions assets as more funds shift to a “global market-weighted” approach, according to the report.
• Yes, pension funds should be investing more in UK productive assets
Over the past 25 years the allocation to UK equities by all UK pension schemes, including local government and corporate defined benefit plans, has fallen sharply from just over half of all assets to 4.1 per cent.
Ministers are hoping that a wide-ranging reform of the pensions industry will help to bolster the domestic economy by encouraging UK schemes to invest more within their home country.
As part of this overhaul, the government said last month that it will give itself a reserve power that will allow it to force, or mandate, funds to buy certain assets, including British investments.
A spokesman for the DWP, said: “Our pension reforms will unlock billions of pounds for the UK economy, supporting businesses to grow and creating well-paid jobs across the country that put more money into people’s pockets.
“Pension funds have committed to private market investment targets in the UK voluntarily, due to the potentially higher returns and security for savers. And thanks to our Pension Schemes Bill, an average earner’s pension pot could see a boost of £29,000, making pension pots work harder for savers.”