The sell-off of UK equities by local pension funds over the past three decades needs to be addressed “to make sure that our capital markets remain not only European dominant, but also as globally impactful as they can be”, the head of the London Stock Exchange has said.
Julia Hoggett, who also chairs the Capital Markets Industry Taskforce that has highlighted the huge decline in UK equity investment by local pension funds, also expressed support for the idea of mandating minimum investment levels.
“I understand the nervousness around [mandated equity investment]. I think from a pension point of view, what I’d say is we’ve actually had a form of pension mandation in pensions in the UK in the last 20-30 years – it’s just [been] about buying fixed income,” Hoggett told the Quoted Companies Alliance’s annual conference last week.
“I fundamentally want the London Stock Exchange, and indeed our capital markets as a whole, not just to be a driver of the UK’s presence as a global financial centre, but to be the driver of the UK domestic economy.”
A report published by the taskforce in March found that, over the past 25 years, UK pension funds’ allocation to domestic market equities has been slashed from 53 per cent to just 6 per cent, while their allocation to bonds has risen to 56 per cent.
The share of the UK stock market now owned by pension funds and insurance companies has declined from 39 per cent to 4 per cent and investment in unlisted UK companies to just 1 per cent. In 2021, the Canadian Pension Plan invested £300mn in a single UK company, which is more than the £190mn UK pension firms invested in private equity and growth capital combined, the taskforce found.
“The health of public markets is driven in part by the health of the private markets and the scaling ecosystem that generates those companies,” Hoggett added.
Unlocking the money held in UK pension schemes
City minister Andrew Griffith told the conference that Chancellor Jeremy Hunt “is spending a lot of time looking at how we can better unlock the billions of pounds held in UK pension schemes”.
The UK has “the second-largest pool of pension capital on the planet”, Griffith said. The government is therefore looking to tackle some of the risk aversion in the industry which means “pensioners are getting poorer outcomes in retirement because of the way in which they’re allocating assets”.
Labour’s shadow City minister, Tulip Siddiq, said there was around £2tn invested in defined-benefit schemes and a further £500bn in defined-contribution schemes. “Even mobilising a fraction of these funds could provide a hugely significant source of growth capital for UK companies,” she said.
Steven Fine, chief executive of stockbroker Peel Hunt, said the key to any proposed change would be proportionality. “If you mandate someone to put all of their pension funds in the UK I think there would be all sorts of uproar. But a small percentage in aggregate is an enormous number,” he said. “If it’s £500bn and you take 10 per cent, that’s an awful lot of money that can suddenly start to move the needle.”
Not everyone is a fan of such proposals. The Institute of Economic Affairs, a free market think tank, pointed out that many companies listed in the UK derive most of their income from abroad and added that the pension industry does not need any more regulation.
Yet the UK market needs to “create new flows of long-term equity” to address a structural decline that has seen more companies shift listings to exchanges in the US, according to Rothschild & Co’s head of equity advisory, Richard Wyatt, who also noted the higher yields on offer to investers in the UK.
The FTSE 250 index of mid-cap companies currently offers a dividend yield of 3.5 per cent, which is more than double the 1.56 per cent on offer for the S&P Mid Cap 400, according to FactSet.
“Why? Because there’s not enough buyers. It’s too cheap,” he said.
Improved liquidity and higher valuations were the two principal reasons given by companies interviewed as part of the ongoing Investment Research Review that had either relocated to a US exchange or were planning to, according to its chair, Rachel Kent, who is a partner at law firm Hogan Lovells.
Are US moves working for UK companies?
However, some of those found that “it was not the sunny uplands that they thought it was going to be and they ended up being a much smaller fish in a much bigger pond”, Kent said.
This is backed up by recent analysis from investment bank Lazard, which showed that of the 21 UK companies that have listed on US markets since 2010 only three currently trade above their issue price.
“But what was really interesting in a depressing way… is that quite a few who had fallen out of love with their US listing were thinking of moving but they were not thinking of relocating back to the UK,” Kent said.
Although encouraging pension funds to buy back into their local market might not make much difference to UK equities in isolation, when considered in aggregate they send “a big signal to the outside world, even the domestic economy, that this is an interesting opportunity that we should embrace”, Fine said.
