Let’s end the pension gilt journey, says RUTH SUNDERLAND: As long-term investors, UK pension funds should support the stock market
- Pension and insurance systems should provide the economy with a source of capital
- Freeing up retirement savings could revive the economy
- For this to happen, pension setting needs a major mindset shift
The UK has one of the most developed pension and insurance systems on the planet, with around £5 trillion in assets.
This should provide the economy with a huge advantage: a fundamental source of capital for businesses and infrastructure projects.
As long-term investors, UK pension funds should support the stock market.
Last week, I argued here that freeing up retirement savings and channeling them into productive investments could revive the economy. For this to happen, the pension establishment needs a major mindset shift.
To understand what is happening now, we need to take a brief trip back in time.
Another piece of the puzzle: as long-term investors, UK pension funds should support the stock market
After World War II, pension funds held virtually all of their assets in bonds. Then, in the mid-1950s, there was a huge shift in retirement investment policies here and in the United States, called “the cult of equity.”
Enter George Ross Goobey, who managed Imperial Tobacco’s pension fund, then one of Britain’s largest, who became the high priest of equities. He persuaded directors to invest exclusively in stocks, then a revolutionary move.
Funds were moved wholesale from gilts – government IOUs, considered low risk – and into the stock market, where the risks and returns were higher.
The shock of Robert Maxwell’s pension fund theft led to a desire to reduce risk. When New Labor came to power in 1997, Chancellor Gordon Brown launched a tax raid that delivered a hammer blow to the value of schemes. Fast forward to the financial crisis when the wave of QE money printing increased the size of deficits in many pension schemes. Revamped accounting rules meant the gory details had to be published in annual reports, for all to see.
Over the past two decades, the cult of fairness has died out and the cult of gilts is back in full force.
Figures from the Pension Protection Fund show that in 2008, final salary schemes had more than half of their assets in equities. By 2021, that figure had fallen to less than a fifth.
Of total equity investment, the proportion on the UK stock market has risen from just under half in 2008 to just over a tenth in 2021, with a sharp increase in the amount invested in overseas stock markets .
All the statistics point to the same conclusion: billions of pounds of pension fund money pulled out of the UK stock market and funneled into gilts.
The cult of gilding has rebounded inexorably since the 1990s. Ironically, the obsession with risk avoidance meant that pension funds were locked into low yields on public debt. This had a high opportunity cost: they deprived members of the higher rewards that could have come from business support and infrastructure investment.
Productivity suffered. Worthwhile companies have been deprived of a potential source of capital.
The ownership profile of many of the best-known companies listed on the UK stock market has changed, and not necessarily for the better, with more foreign investors and hedge funds on the share books.
UK pension funds could play a valuable role in long-term responsible ownership and good governance, had they not been sold off.
The links between UK capital markets and financial services and UK industry are eroding. Companies such as Ferguson, Flutter, CRH and Arm shunned the city. Others, including supermarket group Morrisons and Cambridge software group Aveva, have succumbed to overseas takeovers.
The outbreak of gilding had unexpected consequences. It is time for a big reflection.
