Is YOUR pension fund turning its back on Britain?

Shunned: Many of the UK’s pension funds are turning their backs on British businesses

Back yourself or no one else will, so the saying goes. But that does not hold true in the case of Britain’s leading companies. Many of the UK’s largest pension funds are turning their backs on British businesses, investing as little as 0.3 per cent of their billions of pounds in companies listed in the UK, Wealth & Personal Finance can reveal.

Meanwhile, conversely, foreign pension funds are pouring money into UK businesses to enrich their pensioners, experts warn.

The pension funds that manage the retirement savings of millions of retirees – including MPs, university academics, pilots and bankers – are unpatriotically shunning UK stocks.

Chancellor Jeremy Hunt has been nobly calling for more UK pension money to be poured into our country’s companies and it’s no surprise, given how little is currently invested.

Over the past two decades, the proportion of pension assets invested in UK-listed companies has dramatically declined – falling from 53 per cent in 1997 to just 6 per cent in 2021, according to the Capital Markets Industry Taskforce.

Exposure to domestic stocks has plunged further still over the past two years, falling to 4 per cent on average, think-tank the Tony Blair Institute warns.

The institute says that this inevitably has a negative effect on the UK economy. In the space of 20 years, we have moved from £50 in every £100 set aside to pay pensioners going towards UK equities to £4. Many of our legacy defined benefit pensions, which pay out a guaranteed income in retirement, invest even less in UK companies, we can reveal.

The Parliamentary pension scheme (The Parliamentary Contributory Pension Fund) invests just 1.7 per cent of its fund in UK-listed stocks, or 2.8 per cent of its overall quoted shareholdings, as of March 2022. Meanwhile, 59.8 per cent of its total assets (£835 million) were in listed global equities outside the UK.

The Universities Superannuation Scheme, which invests on behalf of 528,000 lecturers and academics, has a 4.4 per cent holding in listed equities.

Meanwhile, pilots working for a stalwart of British brands – British Airways – have just 0.7 per cent invested in UK-listed equities. The airline’s largest pension fund, NAPS, sold off £81 million worth of investments in UK company shares between 2021 and 2022.

Alarmingly, Barclays Bank’s UK Retirement Fund invests none of its £27.2 billion in UK-listed stocks.

Even modern defined contribution workplace pensions invest astonishingly little in British companies. This type of pension is a pot of cash that you and your employer pay into every year and to which you can gain access from the age of 55.

Nest, the largest modern workplace pension fund, which manages the retirement savings of more than 11 million people, has just 3.88 per cent invested in UK-listed companies. Rebecca O’Connor, of pension group PensionBee, says British pensions have 17 times more invested in US stocks than in UK ones. ‘Anyone with a pension is likely to have a greater personal stake in US technology giants such as Apple, Microsoft and Amazon than they are in British companies like Marks & Spencer or Sainsbury’s.

‘Big UK companies are rarely to be seen in the list of a pension fund’s top holdings,’ she says. The Tony Blair Institute warns this has had serious consequences on the economy, as it has depressed UK companies’ valuations, constrained business investment and hampered productivity.

Jeegar Kakkad, of the group, says: ‘We are not backing ourselves, it’s as simple as that.

‘This country has seen the abandonment of investment in the domestic economy by UK pension funds, with the almost total liquidation of their holdings in listed UK equities built up over generations.’ We are not willing to invest in ourselves but other countries’ pension funds do invest in the UK, he adds.

‘If Canadian, American and Australian pensioners are getting rich off our infrastructure and entrepreneurialism, then why can’t we.’

During his Mansion House speech in July, Jeremy Hunt acknowledged the weakness. He said: ‘We have a perverse situation in which UK institutional investors are not investing as much in UK high-growth companies as their international counterparts.’

Jason Hollands, of wealth manager Evelyn Partners, says: ‘Our political class, who are now scratching their heads, mulling ways to reinvigorate the UK markets, have a hand in the situation we currently find ourselves in.

‘The City of London is a major financial market and a significant source of tax income. Large pension and insurance funds were historically an important source of capital for British companies.’

Exactly why are we investing so little?

Gordon Brown’s infamous £5 billion-a-year dividend tax raid is partly to blame, experts say. In 1997 the Labour Chancellor abolished the tax credits that UK pension funds used to receive on UK dividends as an incentive to invest domestically.

The move made it far less attractive to hold shares in British companies. Tough new regulation has since added to the flight from investing in stocks. New rules that made pensions a more significant burden on company balance sheets in the early 2000s have forced the largest defined benefit pension funds to become even more averse to risk.

A falling stock market could suddenly make the fund appear like an enormous liability and bring down the entire company, Jeegar Kakkad explains.

This means those managing pension funds have had to resort to supposedly safer assets such as Government bonds that won’t mature for at least 15 years – where the returns are lower but tend to be more predictable. All of the pension funds mentioned invest heavily in UK bonds and some other UK assets.

‘This created a massive shift from a portfolio that is focused on delivering growth to one focused on safety,’ he says.

But in the past 18 months, even these ‘safest’ of investments have threatened to wipe out pension funding.

Kakkad says: ‘What you have seen is most defined benefit pension funds making slightly more aggressive investment decisions and using clever financial planning in the bonds space.’

Pension funds were pushed to the brink of disaster last October when bond prices started to fall dramatically as interest rates rose.

Meanwhile, the stock markets – which are widely known to be more volatile typically – have proved a relatively safer home for pension investments in the last 12 months. The Bank of England held interest rates at 5.25 per cent last week, in a move that will cause further pain for defined benefit pensions. The way our pension funds are invested needs urgent reform, says Kakkad. ‘Enough is enough, change has to happen fast because it will make everyone richer in the end – both pensioners and our country’s economy.

‘This isn’t playing with pension money, it is about securing our future. At the moment our pensions have been regulated to an inch of their life and it’s not working.’

Is this stifling the UK’S own entrepreneurs?

Britain is a hive of some of the best start-up companies in the world. Many of these relied on funding from large pension schemes in the past, Hollands says. But a lack of capital risks sending budding companies abroad. He says: ‘There is a risk that increasing numbers of companies will switch over to the US markets, others will get snapped up by overseas predators because they are cheap as chips and younger, innovative UK companies in growth industries are already deciding to list on the exchange in the US rather than the UK where they can command higher valuations.’

Kakkad agrees: ‘We have become a pipeline for America, handing them incredible start-up companies. It’s a reflection on our system that we don’t make it easy for our best and brightest to grow here in the UK.’

In July, the Chancellor addressed the growing risk.

He announced a voluntary agreement between some of Britain’s biggest pension firms, including Aviva, Legal & General and Phoenix Group, to commit 5 per cent of their investments to private equity and early-stage businesses, potentially unlocking £50 billion by 2030.

Should we funnel more into UK stocks?

When picking their own investments for Isas and private pensions, DIY investors are more confident in the quality of our nation’s biggest companies.

Many tend to have a higher weighting to their domestic market. The UK represents 4 per cent of global stock market indexes. Therefore a balanced investment fund with no bias would traditionally invest this proportion of its equity investments in the UK.

John Ralfe, an independent pensions consultant, argues that pension funds would do well to stick by this rule of thumb. He says: ‘As a principle of investing, if you are trying to invest your money for the highest return, lowest risk and greatest degree of diversification, there’s no reason for pension funds to increase their exposure to the UK.

‘The proportion of assets invested in equities is much lower than it was 20 years ago. You would expect no more than 4 per cent of that to be invested in UK-listed equities.’

Meanwhile, US equities make up around 70 per cent of the global market indexes – and UK pension funds have responded to this by increasing their investments.

Asked about the Parliamentary Contributory Pension Fund’s exceptionally low level of investments in UK stocks, a spokesman for the scheme says: ‘The PCPF invests in a wide range of asset classes on a global basis.

‘Besides listed equities and gilts, the fund invests in a range of productive assets, including a 10 per cent allocation to UK properties and 10 per cent committed capital in infrastructure funds.’

Similarly, the Universities Superannuation pension fund invests a greater amount in private UK investments – at 17 per cent of all assets.

This includes investments in key infrastructure assets, wind farms and utilities, as well as real estate and private credit.

A spokesman at Nest says: ‘We’re looking for opportunities in unlisted growth companies in the UK as part of our private equity investing, so we can directly support British businesses.

‘Nest has one of the most diversified defined contribution portfolios in the UK. This helps us invest in different ways, such as directly into UK infrastructure projects and British companies looking to grow their business.’