British businesses risk being starved of investment as pension funds sell off assets to meet a wave of retirement claims, Goldman Sachs has warned.
Analysts at the Wall Street bank have sounded the alarm over investment levels flatlining in the UK after research found final salary schemes are selling almost as many British stocks as other pension funds are buying.
This has meant that UK-listed companies are receiving just £500m in net investment from pension funds each year.
Goldman Sachs said defined benefit (DB) schemes – which pay a fixed income but are largely closed to new savers – are selling £2.5bn of shares per quarter to pay out pensions to retirees.
At the same time, defined contribution (DC) pensions – which do not guarantee a specific income but depend on the performance of financial markets – are buying £3bn of equities over the same period.
However, the vast majority of this net investment is being ploughed into foreign stock markets, with only a quarter being diverted to British stocks.
In the 1990s, final salary schemes owned half of all UK shares, Goldman Sachs said.
By comparison, they now hold just 3pc after years of transferring funds to bonds, property and other assets deemed to be lower-risk.
DC schemes, which are growing in number, typically put a greater share of their investments in equities compared to DB schemes, which are shrinking.
However, the Goldman Sachs report warned this does not mean British shares should expect a boost in the coming years.
Analyst Sharon Bell said: “Even if DC funds – which tend to allocate much more to equity – become the dominant part of the pension pie, we might still find a lack of [demand] for domestic stocks from this source.
“Incentives to capture these assets for UK investment along with a compelling equity-market growth story would be needed to change this. Of course, this is somewhat circular; there is a need for domestic investors/ownership in order to deepen the capital market and encourage new companies to list.”
The Government is trying to address this with a range of new policies, including a British ISA that allows savers a bigger tax-free pot if they invest in UK-listed shares.
Chancellor Jeremy Hunt said the ISA’s extra £5,000 allowance will “ensure that British savers can benefit from the growth of the most promising UK businesses as well as supporting them with the capital to help them expand”.
A HM Treasury spokesman said: “At Spring Budget, the Chancellor announced plans that build on current reforms to strengthen the UK’s capital markets, increase liquidity, boost savings, and facilitate investment in UK companies – and said that he will consider what further action should be taken if pension investment does not take a positive trajectory towards international best practice.
“Already our Mansion House and Edinburgh reforms are delivering a plan for long-term growth of the economy, including unlocking up to £75bn from pension funds and a compact encouraging defined contribution funds to reach 5pc investment in unlisted UK equities.”
