New Financial says a more vibrant stock market would enable more UK companies to raise more capital to invest in jobs and growth
Pension Schemes Bill amendments to boost defined contribution (DC) allocations to UK equity could boost investment by up to £100bn, a think-tank says.
A report by New Financial – How to boost investment in UK equities by UK pensions – highlighted what it said was a "stark decline" in the allocation of DC pensions to UK equities over the past decade and their low level of investment in domestic equities compared with other countries.
It said a dynamic public equity market matters for millions of individuals in every corner of the country and for the UK economy – adding that listed UK companies made a large direct economic contribution to local economies through their footprint and operations, employing nearly four million people up and down the country.
New Financial said a more vibrant stock market would enable more UK companies to raise more capital to invest in jobs and growth, provide a funding continuum for high-growth and tech firms to scale up and stay in the UK. It added it would also help connect millions of individuals saving for their pension with UK companies and send a strong signal on investment in the UK.
And it set out five potential reforms to increase the allocation to the UK market by DC pensions by between £50bn and £100bn – increases New Financial said would still leave schemes "comfortably in line" with their international peers and recent historical norms.
The potential options set out in the report were:
- Do nothing: Allow the market to adjust to recent geopolitical shifts and changes in the relative performance of different markets, and allow the reforms already underway in UK pensions and capital markets to play out.
- Contributions: Set a minimum UK equities allocation for pension contributions that attract higher or additional rate tax relief (nearly two-thirds of all contributions).
- Tax-free lump sum: Increase the tax-free lump sum that people can take out of their pension from 25% to as much as 35% for pension pots with a higher allocation to UK equities.
- Mandation: The ‘nuclear option' of requiring pensions to have a minimum allocation to UK equities of 20% to 25% of their total investment in equities.
- A UK weighted default fund: Require DC default funds to have a UK weighting of 20% to 25% of their total investment in equities, with the option for people to opt out.
New Financial analysed each of these proposals on five factors – the potential impact on levels of investment in UK equities by 2030; how simple it is to understand and to implement from a legislative and regulatory perspective; how practical it would be for the industry and individuals to manage; how much challenge it might face from the industry and other stakeholders; and how difficult it might be from a political perspective.
The think-tank's report also challenged what it said were three common arguments in this debate – that it is not the role of government to intervene in the asset allocation of UK pensions; that individuals only care about returns from their pension; and that any additional investment in UK equities would undermine the optimal ‘global diversification' of UK pensions.
New Financial said: "While we do not recommend mandation, we think there is a strong social contract argument for a more robust role for government in an industry in which many decisions are already defined by legislation and regulation, and which benefits from such high tax relief."
It added the move to higher UK allocations might also be popular with members.
The think-tank added: "When we asked more than 1,000 people with a pension what they thought, we found that they were more interested in more of their pension being invested in the UK than solely in performance."
