Pension funds will have to disclose the proportion of their assets that are held in UK equities, according to chancellor Jeremy Hunt in the 2024 Spring Budget.
Addressing the House of Commons today (6 March), Hunt said both defined contribution and local government pensions will have to disclose their international and domestic exposure, and added that further action would have to be taken if not enough funds are invested in the UK.
According to the accompanying document for the Budget, the average pension allocation to UK equities stands at 6%.
“To improve data on current holdings, the government intends to bring forward requirements for Defined Contribution pension funds to publicly disclose the breakdown of their asset allocations, including UK equities, working closely with the Financial Conduct Authority (FCA) who share responsibility for setting requirements for the market,” it stated.
“The FCA will consult in the spring. The government will introduce equivalent requirements for Local Government Pension Scheme funds in England & Wales as early as April 2024.
“The government will review what further action should be taken if this data does not demonstrate that UK equity allocations are increasing.”
Could it backfire?
Laith Khalaf, head of investment analysis at AJ Bell, warned that this could “backfire” on British business, as funds with high UK equity exposure could end up getting shunned.
“If league tables for pension fund performance were published right now, they would probably show those with high exposure to UK shares languishing near the bottom. The poorly performing schemes the chancellor wants to close to new business could very well be the same ones he wants to champion as exemplary models of investment in UK plc.”
According to AJ Bell research, the average insurance company pension fund investing in UK shares has returned 40.7% over the last decade compared to 143.2% from more regionally diversified mandates.
“In reality the default funds targeted by the new pension reforms would never invest in just UK equities. But the vast gulf in regional equity performance shows the challenge faced by those schemes who might want to stick their head above the parapet and invest heavily in UK shares,” Khalaf continued. “It also highlights the fact that the government’s decision to make pension funds publish their UK exposure as well as their performance might actually result in default fund selectors shunning funds which have bet heavily on UK plc.”
Philip Smith, DC director at TPT Retirement Solutions, added there is a risk the government’s plan could “conflict with its policy to compare scheme investment performance”.
“While many trustees will be open to investing more in the UK, we expect they will still prioritise the investment performance, in line with their fiduciary duty,” he reasoned. “However, even if schemes do increase investment into UK equities, it may not provide the boost to the economy that the chancellor hopes.
“Many large UK-listed companies such as those in the oil and gas or mining sectors, earn significant amounts of revenue from business overseas.”
Richard Parkin, head of retirement at BNY Mellon Investment Management, added: “The chancellor’s announcement requiring schemes to disclose their UK equity allocation will do nothing more than confirm what we already know, that pension funds generally have no bias to the UK. More direct action will be needed to bring about any real change and drive greater UK investment.
“Of course, governments dictating investment policy introduces myriad issues, but given the cost of pension tax reliefs to the UK exchequer many would argue that UK plc should see a larger share of these investments.”
