Mansion House speech tomorrow – Chancellor needs to be much bolder in ensuring pensions support British markets and growth
- Let’s hope this year’s Mansion House speech will be much bolder in driving pension funds to boost Britain.
- Last year’s voluntary agreement by some pension funds to invest 5% in unlisted assets by 2030, did not stipulate any requirement for the money to back UK businesses!
- UK pension fund assets need to increase their massive underweighting in UK markets – as a quid pro quo for continuing to receive £70billion a year in tax and NI reliefs.
- Just 5% of funds helping start-ups and scale-ups from Defined Contribution schemes by 2030 and perhaps another 5% of assets from Local Authority pension schemes, seems rather unambitious.
- Well over 25% of each pension contribution comes from taxpayers, so there is a strong case to require at least 25% of all new contributions to be invested in the UK.
I hope the new Chancellor’s Mansion House speech will be much bolder than last year’s. Although widely welcomed at the time, it is clear the 2023 commitment by some pension funds, to invest 5% of their assets in unlisted start-ups and scale-ups by 2030, was not all it seemed. It turns out, not a penny of that voluntary compact has to be invested in the UK at all. With all the money potentially going overseas, this was a massive missed opportunity to help boost British growth. The Chancellor has an opportunity to change that tomorrow.
It is way past time for Government, on behalf of British taxpayers, to ensure more domestic pension assets are invested here: This can be a game-changer for UK financial markets, which have lagged other countries and contributed to lower British growth. Britain has fallen behind in terms of productivity and technology funding, as the once-robust domestic institutional asset base that supported UK companies has withered away. Our markets and businesses have been starved of domestic risk capital.
Unless capitalism is finished, riskier assets should outperform low-return, lower-risk assets over the long-term, yet Regulators have driven pensions away from equities: When I started my city career, managing large investment pools for insurance and pension funds, the vast majority of this money went into the UK, especially focussed on equities. The long-term return expectations from risk assets are always greater than those of supposedly lower-risk bonds or gilts. So, unless capitalism is finished, it would always be assumed that long-term investors should have significant sums in equities, property or other types of risk such as small start-ups and even infrastructure projects. This conventional thinking has been turned on its head, not only by cutting exposure to equities and other higher expected return assets, but also by selling out of the UK itself.
It is time to replace the caution of regulators and trustees with ambitious long-term investment in a broadly diversified range of assets that can benefit all: This could be a win-win situation, boosting the prospects for British businesses, UK financial markets, the domestic economy, and society – while also delivering better risk-adjusted long-term returns for pension holders.
We need to break the vicious circle of recent years: UK investors, especially pension funds, have constantly been reducing their exposure to domestic equities, which has led our markets to underperform. This provoked further selling, as domestic investors cite past underperformance as a reason to put more outside the UK. By ensuring taxpayer contributions are, to a reasonable extent, invested in British assets, the vicious circle can become a virtuous one, where new buying starts to create further buying as our markets perform better.
I would like to see at least 25% of new contributions invested in domestic assets, if pension funds want the tax relief: At least 25% of each pension fund originates from tax and National Insurance reliefs, costing taxpayers over £70billion a year and 25% of each pension is withdrawn tax-free. In exchange for these generous tax subsidies, there is clearly justification for the Government to require more pension assets to support UK markets, infrastructure and economic growth. This would not force them to buy British, but would offer a significant financial incentive to do so. If they continue to cite ‘fiduciary duty’ and the past performance figures which show UK markets have underperformed in past years (much of this being due to pension fund selling of course) then they can invest more than 75% abroad, but they will not receive the tax relief. It is their choice, but should not expect a taxpayer subsidy for that.
Other countries’ pension funds are massively overweight in their domestic markets, while UK pension funds are heavily underweight: The underweighting of UK equities by our own pension funds looks like a vote of ‘no confidence’ in our corporate sector, which damages confidence in UK markets as a whole. Other countries ensure their pensions and tax-favoured investment funds are heavily overweight in their own domestic markets. Isn’t it time for the UK to do the same? The following tables show clearly how the UK is an outlier in international comparisons.
Other countries’ pension funds heavily overweight their own assets:
Country | Domestic Equity | MSCI weight | Relative |
Australia | 37.7 | 1.3 | 2800% |
Italy | 41.0 | 0.6 | 6733% |
Japan | 49.4 | 4.4 | 1023% |
France | 26.0 | 2.7 | 863% |
USA | 63.5 | 43.2 | +47% |
UK | 2.8 | 4.5 | -38% |
– source: Capital Markets Industry Taskforce, data as at Dec 2023
Examples of large global pension fund investment allocations – only UK funds underweight own equity market
Country and pension scheme | Allocation to domestic equity | MSCI – % weight in index | Relative weight |
Canada – Public Service Pension Plan | 8.9 | 3.2 | +178% |
Canada OMERS1 | 13.7 | 3.2 | +326% |
Canada – HOOPP | 10.8 | 3.2 | 237% |
Japan – Government Pension Investment | 49.8 | 4.4 | +1026% |
Japan – Local Government Officials | 49.1 | 4.4 | +1010% |
Japan – National Federation of Mutual Aid | 49.2 | 4.4 | +1012% |
France – ERAFP | 35.0 | 2.7 | +1226% |
France – FRR | 17.0 | 2.7 | + 552% |
Australia – Australian Super | 45.2 | 1.3 | +3303% |
Australia – Future Fund | 28.9 | 1.3 | +2074% |
Australia – Aware Super | 39.0 | 1.3 | +2836% |
South Korea – National Pensions | 34.2 | 1.3 | +2600% |
South Korea – Teachers Pensions | 44.1 | 1.3 | +3380% |
US – California State Pension (Calpers) | 60.1 | 43.2 | +439% |
US – New York State Common | 68.9 | 43.2 | +59% |
US – New York City Retirement | 61.4 | 43.2 | +42% |
UK – Universities Scheme USS | 2.2 | 4.5 | -51% |
UK – Railways Pensions (Railpen) | 3.3 | 4.5 | -25% |
UK – HSBC | 2.5 | 4.5 | -43% |
UK – Parliamentary Pension Fund (PCPF) | 1.7 | 4.5 | -62% |
Mansion House reforms should be expanded to include listed companies as well as unlisted and focus on UK businesses: I hope the new Chancellor will be more ambitious and expand these reforms so that pension funds are encouraged to invest more in both listed small growth businesses and unlisted start-up firms –based in the UK – to really boost our promising smaller companies and prevent the best being snapped up on the cheap by overseas rivals.
Let’s hope Government will finally ensure UK pension assets put more into our own growth, infrastructure, small start-ups and scale ups, both from Defined Contribution and Defined Benefit funds, to boost all our futures.