Let’s end pension gilt trip, says RUTH SUNDERLAND
Let’s end the journey to pension gilding, says RUTH SUNDERLAND: As long-term investors, UK pension funds should support the stock market
- Pension and insurance systems must provide the economy with a source of capital
- Releasing retirement savings could kick-start the economy
- For that to happen, the institution of pensions needs to undergo a major change of mindset
The UK has one of the most developed pension and insurance systems in the world, with around £5 trillion in assets.
This should provide a huge benefit to the economy: a basic 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 unleashing retirement savings and channeling them into productive investment could get the economy going again. This requires a major mind shift in the pension sector.
To understand what is happening now, we need to make a short time travel.
Another piece in the puzzle: British pension funds, as long-term investors, should support the stock market
After the Second World War, pension funds kept almost all of their assets in bonds. In the mid-1950s, there was a massive shift in retirement investment policies here and in the US, dubbed “the cult of equity.”
Take George Ross Goobey, who managed the Imperial Tobacco pension fund, then one of the largest in Britain, who became the high priest of equities. He persuaded the trustees to invest exclusively in stocks, a revolutionary move at the time.
Funds moved en masse from gilts — government IOUs, which are considered low risk — to the stock market, where risks and returns were higher.
The shock of the robbery of Robert Maxwell’s pension fund led to a desire to reduce risk. When New Labor came to power in 1997, then-Chancellor Gordon Brown launched a tax raid that dealt a massive blow to scheme values. Fast-forward to the financial crisis, when the wave of QE money printing exacerbated the size of deficits in many pension plans. Revamped accounting rules meant the gory details had to be published in annual reports for all to see.
In recent decades, the cult of equity has died down and the cult of gilts has made a comeback.
Figures from the Pension Protection Fund show that in 2008 final salary schemes had more than half of their assets in shares. By 2021, that had fallen to less than a fifth.
Of total equity investment, the share in the UK stock market fell from just under half in 2008 to just over a tenth in 2021, with a sharp increase in the amount invested in foreign equity markets.
All the statistics point to the same conclusion: billions of pounds of pension fund money have drained out of the UK stock market and into government bonds.
The cult of the gilt has rebounded inexorably since the 1990s. Ironically, the obsession with avoiding risk meant that pension funds were stuck with low returns on government debt. This has come at a high opportunity cost: they have deprived members of the higher rewards that might have come from supporting businesses and investing in infrastructure.
Productivity has been affected as a result. Valuable companies are starved 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 stock registers.
UK pension funds could play a valuable role in long-term responsible ownership and good governance, if they hadn’t been sold out.
The links between UK capital markets and financial services and UK industry are being eroded. Companies such as Ferguson, Flutter, CRH and Arm have stared the City down. Others, including supermarket group Morrisons and Cambridge software group Aveva, have succumbed to foreign takeovers.
Gilt tripping has had unintended consequences. It’s time for a major rethink.