Is YOUR pension fund turning its back on Britain?

Support yourself or no one else, as the saying goes. But that doesn’t apply to Britain’s leading companies. Many of Britain’s largest pension funds are turning their backs on British companies, investing just 0.3 percent of their billions in companies listed in Britain, Wealth & Personal Finance has revealed.

Meanwhile, foreign pension funds are pumping money into British companies to enrich their pensioners, experts warn.

The pension funds that manage the retirement savings of millions of retirees – including MPs, university academics, pilots and bankers – are unpatriotically avoiding UK shares.

Chancellor Jeremy Hunt has nobly called for more British pension money to be pumped into our country’s businesses, and that’s no surprise given how little is currently being invested.

The share of pension assets invested in UK listed companies has fallen dramatically over the past two decades – from 53 per cent in 1997 to just 6 per cent in 2021, according to the Capital Markets Industry Taskforce.

Exposure to domestic equities has fallen further to an average of 4 percent over the past two years, the Tony Blair Institute think tank has warned.

The institute says this will inevitably have a negative impact on the UK economy. In 20 years we have gone from £50 in every £100 set aside to pay pensioners moving into UK shares to £4. Many of our legacy defined benefit pension schemes, which pay out a guaranteed income at retirement, are investing even less in UK companies, we can reveal.

The Parliamentary Contributory Pension Fund invests only 1.7 percent of its fund in British-listed shares as of March 2022, or 2.8 percent of its total listed shareholdings. Meanwhile, 59.8 percent of its total assets (£835 million) were invested in listed global equities outside Britain.

The Universities Superannuation Scheme, which invests on behalf of 528,000 teachers and academics, has a 4.4 percent stake in listed shares.

Meanwhile, pilots working for a host of British brands – British Airways – have just 0.7 percent invested in British listed shares. The largest airline pension fund, NAPS, has sold £81 million worth of investments in UK company shares between 2021 and 2022.

Alarmingly, Barclays Bank’s UK Retirement Fund does not invest any of its £27.2 billion in UK listed shares.

Even modern defined contribution occupational pensions invest surprisingly little in UK companies. This type of pension is a pot of cash that you and your employer pay into annually and which you can access from the age of 55.

Nest, the largest modern workplace pension fund, which manages the retirement savings of more than 11 million people, has just 3.88 percent invested in UK listed companies. Rebecca O’Connor, of pension group PensionBee, says British pensioners have invested 17 times more in US shares than in British ones. ‘Anyone with a pension is likely to have a greater personal stake in American technology giants such as Apple, Microsoft and Amazon than in British companies such as Marks & Spencer or Sainsbury’s.

“Large British companies are rarely found on a pension fund’s top holdings list,” she says. The Tony Blair Institute warns that this has had serious consequences for the economy, depressing the valuations of British companies, limiting business investment and hampering productivity.

Jeegar Kakkad of the group says, “We don’t support ourselves, it’s as simple as that.

“This country has seen British pension funds withdraw from investment in the domestic economy, with their holdings in listed British shares almost completely liquidated over generations.” We are not prepared to invest in ourselves, but other countries’ pension funds are investing in Britain, he adds.

“If Canadian, American and Australian retirees are getting rich off our infrastructure and entrepreneurship, why can’t we?”

During his Mansion House speech in July, Jeremy Hunt acknowledged the weakness. He said: ‘We are facing a perverse situation where UK institutional investors are not investing in UK high-growth companies as much as their international counterparts.’

Jason Hollands, of asset manager Evelyn Partners, said: ‘Our political class, who are now scratching their heads and thinking about ways to revive the UK markets, have a hand in the situation we currently find ourselves in.

‘The City of London is a major financial market and a major source of tax revenue. Large pension and insurance funds have historically been an important source of capital for British companies.’

Why do we actually invest so little?

Gordon Brown’s infamous £5bn-a-year dividend tax is partly to blame, experts say. In 1997, the Labor Chancellor abolished the tax breaks that British pension funds used to receive on British dividends as an incentive to invest domestically.

This move made it much less attractive to hold shares in British companies. Since then, strict new regulations have increased the flight from stock investing. New rules that made pensions a bigger burden on corporate balance sheets in the early 2000s have forced the largest defined benefit pension funds to become even more risk averse.

A falling stock market could suddenly make the fund look like a huge liability and bring down the entire company, Jeegar Kakkad explains.

This means that those who manage pension funds have had to resort to supposedly safer assets, such as government bonds that don’t mature for at least 15 years – whose returns are lower but tend to be more predictable. All pension funds mentioned invest heavily in British bonds and some other British assets.

“This created a huge shift from a portfolio focused on achieving growth to a portfolio focused on safety,” he says.

But over the past eighteen months, even these ‘safest’ investments have threatened pension funding.

Kakkad says: “What you’ve seen is that most defined benefit pension funds are making slightly more aggressive investment decisions and using smart financial planning in the bond space.”

Pension funds were pushed to the brink last October when bond prices began to fall dramatically as interest rates rose.

Meanwhile, the stock markets – which are generally known to be more volatile – have proven to be a relatively safer home for pension investments over the past twelve months. The Bank of England kept interest rates at 5.25 percent last week, a move that will cause further pain for promised pensions. The way our pension funds are invested urgently needs to be reformed, says Kakkad. ‘Enough is enough, the changes must happen quickly, because in the end everyone will be richer – both the pensioners and the economy of our country.

‘This is not playing with pension money, it is about securing our future. At the moment our pensions are arranged to within an inch of their lives and that doesn’t work.’

Does this suffocate Britain’s own entrepreneurs?

Britain is a hive of some of the best start-up companies in the world. Many of these projects in the past depended on financing from large pension plans, Hollands says. But a lack of capital threatens to send start-up companies abroad. He says: ‘There is a risk that more and more companies will switch to US markets, others will be snapped up by overseas predators because they are as cheap as chips, and younger, innovative British companies in growth industries are already deciding to move into US to enter the market. the stock market in the US rather than in Britain, where they can command higher valuations.’

Kakkad agrees: “We have become a pipeline for America, bringing them great start-up companies. It is a reflection of our system that we do not make it easy for our best and brightest to grow here in Britain.”

In July, the Chancellor addressed the growing risk.

He announced a voluntary agreement between some of Britain’s largest pension companies, including Aviva, Legal & General and Phoenix Group, to allocate 5 percent of their investments to private equity and start-ups, potentially raising £50 billion by 2030 freed.

Should we invest more in UK shares?

When choosing their own investments for Isas and private pensions, DIY investors have more confidence in the quality of our country’s biggest companies.

Many tend to have a larger weighting towards their domestic market. Britain represents 4 percent of global stock indices. Therefore, a balanced investment fund without bias would traditionally invest this portion of its equity investments in the UK.

John Ralfe, an independent pension advisor, states that pension funds would do well to adhere to this rule of thumb. He says: ‘As an investment principle, if you try to invest your money for the highest return, lowest risk and greatest degree of diversification, there is no reason for pension funds to increase their exposure to Britain.

‘The share of assets invested in shares is much lower than twenty years ago. You would expect no more than 4 percent of that to be invested in British listed shares.”

Meanwhile, US shares make up around 70 per cent of global market indices – and UK pension funds have responded by increasing their investments.

Asked about the Parliamentary Contributory Pension Fund’s exceptionally low level of investment in UK equities, a spokesperson for the fund said: ‘The PCPF invests globally across a wide range of asset classes.

‘In addition to listed shares and government bonds, the fund invests in a range of productive assets, including a 10 per cent allocation to UK properties and 10 per cent committed capital to infrastructure funds.’

Similarly, the Universities Superannuation pension fund invests a larger amount in private UK investments – 17 percent of all assets.

This includes investments in key infrastructure assets, wind farms and utilities, as well as real estate and private credit.

A Nest spokesperson said: ‘We look for opportunities in unlisted growth companies in Britain as part of our private equity investments, so we can directly support UK businesses.

‘Nest has one of the most diversified defined contribution portfolios in the UK. This helps us invest in a number of ways, such as directly into UK infrastructure projects and UK companies looking to grow their businesses.”