Institutional Asset Manager Newsletter 08.03.24

Targeting pensions

Chancellor Jeremy Hunt’s Spring Budget 2024 kept pension funds firmly in the crosshairs of his target for greater investment in the UK.
Following on from last year’s proposed Mansion House reforms which will encourage retirement plans to direct more money to private markets, Hunt used the Budget to confirm rumours that he will require pension funds to report how much they invest in UK equities.
At present the UK stock market accounts for about 4 per cent of the world’s listed equities, and current figures suggest that investment in UK equities across the pensions industry stands at around 6 per cent.
Improving data on UK equity holdings is intended to enable the government to assess whether UK equity allocations are increasing and, if not, to "review what further action should be taken".
But industry commentators are already expressing concern about State interference in private investments, especially driving schemes towards asset classes that may not be the best performers.
Steven Leigh, Associate Partner at Aon, says: "The government appears to be taking a ‘what gets measured, gets done’ approach to encourage more investment from pension schemes in UK equities. A significant obstacle to this is that UK listed companies now only make up around 4 per cent of the global market. Therefore, pension schemes which are overweight in UK are taking an implicit bet with savers’ money that the UK will outperform other markets."
Leigh notes that over recent years this has not been the case, with the FTSE-All Share index returning around 7 per cent per year on average compared to 10.5 per cent per year from the MSCI All world index over the last 20 years.
However, there are those – Baroness Ros Altmann being one of them – who believe that the Chancellor "is right to expect our pension funds to back Britain, not least because they are receiving massive amounts of money from all taxpayers [in tax and NI relief]".
Altmann said: "What do taxpayers as a whole receive for that investment? Surely it is not unreasonable for them to expect this money to support British growth, as our pension funds used to, before regulatory decisions drove trustees and managers away from domestic equities."
Yet pensions are an investment made on behalf of members, and trustees have a fiduciary duty to ensure they are made in the best interests of beneficiaries. Attempts to divert money into a particular economy – be that domestic or abroad – seems a dangerous game for politicians to play. If the UK economy tanks and the nation’s schemes are disproportionately weighted, it will be individuals left to make up the shortfall.
In other news this week, Matt Livas, Head of Client Portfolio Management for Barings public fixed income team, warns that UK pension funds may be overexposed to domestic gilts.
"Crowding into an asset class which may not have great liquidity can be damaging; we saw that with the gilt crisis in 2022. Investors should think about diversifying by type of credit and geographically," Livas said, and suggested schemes look at overseas bonds markets for broader diversification.
Perhaps the adage of ‘not keeping all your eggs in one [British] basket’, hasn’t been entirely forgotten.

Gill Wadsworth, Editor
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