Our savers and our businesses are losing out from stagnant pension rules in the UK
Pensions are a vital part of our later lives. As life expectancy increases with improvements in healthcare and lifestyles, our pensions will need to work even harder. Pension funds are also a vital source of investment upon which the businesses of today depend.
Over the past twenty years, the UK has suffered a significant decline of investment in the domestic economy by UK pension funds. According to a report this year by the Tony Blair Institute for Global Change, UK private sector pension fund holdings of UK equities fell from an average of 50 per cent of the portfolio in 2001 to just 4 per cent today. Much of this can be attributed to indexation and the dominance of passive funds, driven by a focus on reducing investment management costs.
This has been bad for the economy and bad for pensions. Businesses have been starved of investment, declining as a share of GDP, while the UK has the only major equity market whose value remains below the peak it reached prior to the financial crisis. In practical terms, far too many UK firms, especially scale-ups at the acceleration stage of their journey, have to turn to overseas investors for the capital they need, and end up listing overseas rather than here in London.
At the same time, returns from UK pensions have underperformed compared to many of our competitors, despite having the second largest fund pot in the world. This is partly due to regulatory barriers, and partly due to other long-standing structural issues, such as the widely fragmented nature of our pension system. These factors cannot be resolved overnight.
But the City and the Treasury are working together to turn this situation around.
This week, the City and EY are convening key operators across the DC pensions industry for the Mansion House Pensions Summit, to build on the momentum of the Compact and to translate intent into action. As well as this collective action from pension industry participants, we need to continue to develop a supportive public policy framework to allow institutional investors to invest in asset classes such as unlisted equity. We will be drawing on the views of experts from across the defined contribution pension value chain, including trustees, asset managers and consultants.
The Mansion House Compact, agreed earlier this year, brought together nine of the UK’s largest pension providers, voluntarily signing up to the objective of allocating 5 per cent of assets in their default funds to unlisted equities by 2030. These providers represent over £400bn in assets and make up the majority of the UK’s Defined Contribution workplace pensions market. With DC pensions growing by 10 per cent per annum, this could unlock up to £50bn of investment in high-growth companies.
At the same time, the Treasury’s Mansion House Reforms aim to deliver better returns for savers through a new “value for money” framework, with underachieving pension schemes wound up into larger, better performing schemes. We need to keep building on this progress and work with the sector on implementation.
Working together, we can take meaningful action to take down the current barriers that hinder investment and enable the kind of returns pensioners across the world see while also unlocking fresh investment for our businesses.