UK pension funds’ allocations to British stocks hit historic low

UK pension schemes have among the lowest proportion of funds held in domestic stocks and private assets of any significant global pension market, according to a new report, adding pressure on the government to revive investment in British industry.

Just 4.4 per cent of UK pension assets are held in domestic equities, down from 6 per cent last year and much lower than a 10.1 per cent global average. Only Canada, the Netherlands and Norway have a lower allocation, according to a study by think-tank New Financial.

UK pensions also punch below their weight in private markets, with defined-contribution schemes allocating just 2 per cent to unlisted British equities, rising to only 5 per cent for private-sector defined-benefit schemes and 10 per cent for local government pension schemes.

The report comes as politicians debate whether domestic pension schemes should have greater incentives or requirements to invest in British assets and how far they should be consolidated, with a “call for evidence” published on Wednesday to gather industry views.

Chancellor Rachel Reeves has made a review of the pensions industry a cornerstone of her plans to boost the economy and lift investment in productive British assets.

Last month Reeves said she was seeking to create a “Canadian-style” model, which could include consolidating the £360bn local government pension scheme, which is fragmented into 86 individual funds in England and Wales.

By contrast Canadian schemes have around 3 per cent of assets in listed stocks but 22 per cent in private equity and 12 per cent in infrastructure, according to New Financial.

Big schemes in Finland, the Netherlands, Australia, the US and Denmark all have private equity allocations in the low to high teens, it found.

John Graham, president and chief executive of the Canada Pension Plan Investment Board, one of the world’s biggest pension funds, told the Financial Times last year that he was opposed to “any constraint on portfolio construction” or “any influence to invest in a specific asset class or a specific part of the market”.

CPPIB has delivered annualised returns of 9.2 per cent over the past decade.

Pension ownership of UK stocks has declined from around 50 per cent at the turn of the century as a slew of regulatory changes pushed corporate defined-benefit pension schemes into bonds, while they have also de-risked as they mature and wind down. 

The UK’s corporate DB schemes — which have around £1.4tn in assets or close to half of the UK’s pensions assets — have only 13 per cent invested in equities and only 1.4 per cent in domestic equities, lower than every other system except the Netherlands.

The £430bn UK public-sector pension schemes — most of which is in local government plans — hold around 9 per cent in domestic equities which puts them in the middle of the pack, behind Australia, Japan and the US but ahead of Canada and many European peers. 

Defined-contribution schemes, the fastest growing area with £600bn in assets, have around 55 per cent of their assets in listed equities — but an allocation of 8 per cent to UK stocks puts them close to the bottom of their peer group and roughly half the average of others outside of the US. 

New Financial said changes in private sector DB pensions were the biggest factor behind the UK’s reduced allocation to its stock market.

But it said higher returns elsewhere, scrutiny of costs, stamp duty on UK stock transactions and a reduction in companies going public had also driven the decline.

The report said pension funds could double their allocation to UK stocks — adding roughly £100bn in investment — and still be “well within” international norms.