Require ‘default’ UK weighting in pensions or risk stock market doom loop, report says
Pension funds should be required to have a “default” UK weighting to prevent the London stock market getting caught in a “doom loop”, a new report has argued.
A UK weighted default fund with an allocation of between 20-25 per cent, if made a requirement for defined contribution (DC) pensions with an opt-out for individuals, would pump an extra £76bn into UK equities to rejuvenate the public market, according to projections from New Financial.
“For at least the past decade, the UK stock market has been locked in a self-fulfilling ‘doom loop’ of lower valuations, lower demand and lower performance.”
“External factors such as the disruption from Brexit, a worsening economic outlook and political instability have collided with the structural shift in UK pensions and the withdrawal of natural buyers as UK pension funds have increasingly shifted to a ‘global market weighted’ approach.
“Any reforms that boost the long-term natural flow from UK pensions into UK equities would send a strong positive signal to other investors.”
The allocation to UK equities by DC funds has slipped from 40 per cent of total equities to just 9 per cent over the past decade, representing just 4.9 per cent of total asset allocation. That makes the UK an outlier compared to its economic peers in terms of the share of funds invested in its domestic market.
Pensions mandation would be ‘the nuclear option’
A “do nothing” approach risks seeing DC fund allocation to the UK slip further still to 3.5 per cent by the end of the decade, while full mandation would likely see UK equities rise to around 12.4 per cent of total funds.
New Financial warned that mandation would be “the nuclear option”, arguing that it would “provoke a fierce backlash” and would mean the UK joining China, Hong Kong and India as the only countries that mandate a minimum investment in domestic equities for their pension funds.
But the think tank’s report argued that Brits would be comfortable with seeing more of a home bias in their pension funds. According to a survey of more than a thousand adults, two-thirds (66 per cent) think pensions should invest more in UK companies even if the returns are lower, while they expected that funds already had a 41 per cent allocation in UK companies.
“Most UK pensions today have a bigger investment in Walmart than they do in Sainsbury’s or Tesco, or own more shares in companies like Boeing or GE than they do in Rolls-Royce,” New Financial said.
A “tangible connection” between UK pensions and UK assets “would also help reconnect millions of individuals in every corner of the UK with their pension and with companies that have a footprint in every region of the country, and help support a cultural shift from saving to investing.”