There are a host of items that were relied upon heavily 25 years ago that are almost obsolete today. A quick list might include pay phones, dial-up internet and CDs.
Closer to investment markets, however, and one activity that has almost died a death since the start of the century is the reliance of UK pension funds on their home equity markets. Although it is a stretch too far to say the undertaking has become obsolete, data shows that British pension funds have gone from investing more than 50% of their assets in UK equities in 2000 to a little over 4% today.
The slide has been as sharp as it has been alarming, with the UK chancellor Rachel Reeves making it one of her priorities to get UK pension schemes to buy British stocks once again. Since Labour came to power last year, she has made a review of the pensions industry a cornerstone of her plans to boost the economy and lift investment in British assets.
But there are those who are surprised that as many UK pension funds invest in British stocks as they do. The sense is the 4% figure could in fact be much lower.
One pension fund manager, who was only happy to talk off the record because the issue was “too emotive and political”, said the situation could be far worse.
“We are not incentivised to invest in stocks, let alone UK stocks, and even where we do want to invest in equities there are much better returns overseas than domestically,” he told portfolio institutional.
“People make too much of this topic and, in my opinion, if the government did intervene it would be a big mistake.”
Stronger together
In fairness to Reeves, she has held back from forcing pension funds to invest at home, with the bulk of her reforms centred around merging the UK’s 86 council pension schemes, which manage assets of between £300m and £30bn, into a handful of pension “megafunds”.
The idea is that the cost savings created by streamlining the system would result in more money being available for domestic allocations.
These megafunds mirror set-ups in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential, which the treasury says could deliver around £80bn of investment.
“We’re going for growth,” Reeves said in a statement. “We can use our economies of scale and expertise to invest in the UK. It doesn’t solve all the issues, but it is very much a step in the right direction.”
The bright lights of Wall Street
Where the pension fund manager does have more of a point is in relation to the performance of the FTSE 100, which has been unremarkable during the past couple of years. While the US’ S&P 500 posted back-to-back returns of more than 20% in 2023 and 2024, the UK’s main index notched up just 3.8% and 5.8%, respectively.
The absence of the tech giants, such as Nvidia, Palantir and Facebook-owner Meta, has been crushing for the FTSE 100. Just look at Nvidia, one of the dominant suppliers of AI hardware and software globally. Its share price rose 130% in 2024, following an eye watering 240% rise a year earlier.
Susannah Streeter, the head of money and markets at broker Hargreaves Lansdown, described the FTSE 100’s recent gains as “paltry”.
She said: “Britain’s blue-chip index still appears unloved with attention grabbed by the bright lights of Wall Street and the tech-heavy makeup of New York’s exchanges, with a frenzy for all things AI fuelling buying behaviour. Even though the Brexit hangover has eased, the UK’s stagnating economy appears to be putting o investors.”
Robin Powell, a campaigner for what he calls positive change in global investing, and author of the blog, The Evidence-Based Investor, adds: “Of course UK equities are worth investing in, but so are stocks in every other market around the world. We must be realistic, We aren’t the global economic powerhouse we were at the start of the 20th century. The UK now accounts for only around 3% of global GDP.”
“So, from a purely financial point of view, I don’t see a case for pension funds allocating more than 5% of their equity exposure to the UK,” Powell adds. “Yes, valuations are low in historical terms but that doesn’t necessarily make this a buying opportunity.”
Thomas Moore, senior investment director of Abrdn’s equity income fund, recognises this argument but, unlike Powell, he is hopeful the low valuations in the UK could play a part in fixing the problem and ultimately tempting pension funds back into British stocks.
“After a long period of political uncertainty, the political backdrop finally appears more stable in the UK than elsewhere in Europe, as reflected in the strength of sterling against the euro,” he says.
“Household cashflows are in good shape, although consumer confidence remains weak, resulting in a tendency to save rather than spend. Investors are waiting for signs of a pick-up in economic activity before allocating to domestic stocks. When animal spirits return, the impact on domestic stocks could be pronounced.”
Final destination
But the lack of interest in UK stocks is not just down to performance problems.
Experts point out that a prolonged shift away from all equities, not just UK stocks, has been driven by several regulatory changes and de-risking among defined benefit (DB) pension schemes, which has forced them into bonds.
This liking for fixed income, they say, has been heightened by a focus on stability and liability matching, especially as DB schemes matured and started to wind down.
“Yes, UK equities have been ditched by British pension funds but only as part of a wholesale move away from all equities into bonds as schemes have matured due to aging demographics,” says Amin Rajan, chief executive of Create Research, an asset management consultancy. He points out that in 1955 British citizens on average lived until they were 70 years old, whereas now they can expect to live beyond 80.
“Under prevailing regulations, schemes have been enjoined to de-risk as their portfolios have increasingly turned cashflow negative. More money is going out as pension payments than coming in as investment income or member contributions,” he says.
Rajan adds that, according to data collected by his company’s annual pension surveys, 70% of UK pension assets went into all equities – UK and global – in 2003. Today, that is down to around 15%. Over the same period, allocations to bonds have jumped from 36% to 55%. Indeed, most notably the huge Boots Pension Scheme sold all of its equities in 2001 to invest entirely in bonds.
Rajan continues: “The implied de-risking has been inevitable as schemes mature, close the doors to new members and freeze accruals to existing ones. This is a structural trend that no rip-roaring equity market can reverse.
“Higher and sustained economic growth can help entice a few schemes back into UK equities. But the majority will be obliged to stick to the de-risking endgame, either via insurance buy-outs or self-sufficiency.”
Axe the tax
So what is the solution?
Some say the government should ideally double the minimum payment thresholds into defined contribution pensions, while others would like to see the Mansion House Compact – in which major pension providers pledged to increase allocations to private markets, including private equity and venture capital – extended to UK equities.
A few more believe stamp duty on UK shares should be scrapped.
Regarding the latter point, there is a fear that the government is taxing the UK stock exchange out of existence and that any reforms to get pension funds investing with greater zeal into British shares should begin with the removal of the 0.5% tax, which is 2.5 times higher than countries in the European Union charge.
In New York, meanwhile, where share prices are comparatively flying, there is no tax at all.
Indeed, the London Stock Exchange saw 88 companies de-list or transfer their primary listing from the main market last year – the most since 2009, according to data from EY. Takeaway giant Just Eat, Paddy Power-owner Flutter, travel group Tui and equipment rental firm Ashtead were among those to announce plans to scrap their main UK listing.
At the end of last year, Abrdn called for an immediate stamp duty cut on FTSE 250 shares in particular on the back of evidence that, during the past 20 years, the number of smaller listed companies with a market capitalisation of less than £1bn has fallen by nearly a third – translating into a net loss of almost 600 companies.
The reluctance to invest in UK stocks was causing a “crisis” for small cap firms, it stated.
Sir Douglas Flint, Abrdn’s chairman, said at the time: “Smaller listed companies are an integral part of the UK economy. They drive innovation and generate wealth and jobs across almost every corner of the country. Given that the government is serious about boosting UK growth…they cannot afford to ignore UK small caps.”
William Wright, founder of think tank New Financial, which provided the numbers showing the slump in pension fund investment in British stocks to around 4% during the past 25 years, is equally fearful.
“UK smaller companies are facing an almost existential threat,” he says. “There are many factors behind the decline but the collapse in demand from UK pension funds – which have increasingly switched to globalised portfolios – has been the main driver.”
Who’s the boss?
That Reeves wants to address the problem is no surprise. She is not the first chancellor to try and do so and will not be last. The fact remains, however, that pension fund trustees are the servants of scheme members – not the government – and that ultimately their fiduciary duty to their clients will decide what they do next.
Powell says: “Pension fund trustees should do their job while ministers and politicians do theirs. Trustees have a responsibility to scheme members and no one else. All their decisions should be made in the best interests of those members. And generally speaking, members’ interests are best served by global diversification and by avoiding the risk of being too heavily concentrated in any particular sector or country, and that includes the UK.”
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