A report by New Financial indicates that the amount of UK pension funds being allocated to UK equities has declined to 4.4% in comparison to last year, when the number was 6.1% and down by half of assets from 25 years ago. The document describes the UK pension eco-system as “bringing up the rear” compared to other developed nations. To quote:
“… allocation to domestic equities is among the lowest of any developed pension system around the world with only Canada, the Netherlands, and Norway having a lower allocation. It is less than half the weighted average allocation to domestic equities across our sample, excluding the US. The overall allocation to equities by UK pension funds of 30% is lower than every market except Canada, Denmark, and the Netherlands.”
And:
“UK pension funds have a significantly lower allocation to private equity and infrastructure assets (around 6% combined) than many of their peers…”
The report acknowledges that the main argument to support the lowing amount of UK shares is that a globally diversified market-weighted approach delivers better long-term risk-adjusted returns. But this does not address the growing importance of private securities markets.
While the report claims that it does not recommend that UK pension funds boost their allocation to UK equities, it does offer a range of policy solutions for the new Labour government to consider that may encourage more investment in UK assets.
Globacap CEO and co-founder Myles Milston calls the report a “wake-up call” for UK pension funds, describing them as “stalling” in comparison to their global peers.
“In the US, CalPERS, one of the largest pension funds in the world, recently announced plans to increase its private markets allocation to 40%,38% above the average in the UK. The UK is one of the most attractive destinations for private investment. The tech sector alone is the number one in Europe by some margin, and number three in the world and has a combined market value of $1 trillion. But these high-growth firms have to look elsewhere for investment, meaning pension funds miss out on potentially lucrative returns and pensioners don’t profit from UK innovation,” said Milston.
He believes that if pension funds want to support the UK economy while providing real value to pensioners, they must boost allocations to private firms.
“Over time, increased investment will be really positive for the startup and innovation ecosystem in the UK, enabling entrepreneurs to access funding earlier in the cycle and accelerate their businesses quicker, similar to how the VC landscape currently works in the US.”
