The drive to invest more pension money in the UK predates the recent Budget.
The term ‘productive finance’ became common parlance across the industry several years ago, as efforts were made to consider the role of long-term assets in driving growth for sectors of the economy needing capital.
Indeed, several initiatives have been launched in the wake of that initial work, including the Long Term Asset Fund, the Long-Term Investment for Technology and Science (Lifts) scheme and perhaps more publicly, the Mansion House compact, which includes a voluntary commitment for pension providers to invest 5 per cent of their default funds into unlisted equities by 2030.
These initiatives are all focused on specific sectors, such as technology and life science, and generally through encouraging investment in unlisted equities, or at least what we might term as illiquid assets.
The emphasis of the Spring Budget was different, in that it was far less narrowly defined, instead announcing measures to encourage UK equity investment more generally.
The premise for this rallying call is that the level of investment by pension schemes in the UK stock market has dropped over the years, and that it is low compared with international counterparts, and how much they allocate to their domestic markets.
Some commentators quote figures below 10 per cent, as to the amount invested by UK pension schemes in UK equities.
In practice, this is more a function of including defined benefit schemes, where the driver is one of de-risking to match liabilities, as opposed to a fundamental desire to invest elsewhere in the world.
We need to be realistic on this point. I can’t see a group of trustees, whose scheme is at or close to buyout levels of funding, suddenly taking on higher volatility assets. That would appear to run contrary to their fiduciary duty, putting promised pensions at risk.
You could make a different argument for a scheme that still has a large funding gap, but it would be a very crude approach to simply seek to remedy that through increasing UK equity investment.
Defined contribution workplace schemes are in a somewhat different place when it comes to UK investment. While there are different weightings, it’s not unusual for default funds to have 25 per cent or more invested in the UK stock market, and more when you add UK bonds, and in some cases property exposure.
Fund managers will debate whether the UK market holds most promise for returns going forward, compared with overseas markets. It’s certainly been a mixed picture over the past decade, but we should always keep in mind that 'past performance is not necessarily a guide to future performance', of course.
Australia is widely regarded as a good example of a mature retirement savings market, and it does have higher levels of domestic investment within its ‘Super’ schemes, including both listed and unlisted assets.
