Pensions – Labour Manifesto + MPs’ scheme

• The Labour Manifesto shows a commitment to increasing investment by pension funds in UK assets and reversing the trend of the past 25 years.

• The record number of new MPs should consider the paltry 1.3% allocation to UK equities in the MPs’ Pension Fund. Changing this would be an excellent way to demonstrate commitment to accelerating UK growth and setting an example for other schemes. 

• Focus on growth – the UK has a large pension market with £2.5tn of assets. However, performance has been well below international peers, as has investment in UK growth assets. Reversing this trend would help to stimulate growth and improve performance.

 

Pensions – long-term negative impact on the UK 

The shift away from equities, and UK equities in particular, has been a feature of the UK market for many years, as shown below.  

Figure 1: Consistent selling of UK assets

Source: New Financial

Given the £2.5tn of pension assets, this effectively means that there has been selling of c.£1tn of UK equities over this period. Given this headwind, it is not remotely surprising that UK companies have been starved of capital and that UK equities have underperformed. There have been suggestions that this selling pressure is easing. The reality is that some funds have now reached a base level, but overall the selling pressure is not yet done. This will come from Defined Benefit (DB) funds de-risking as they move towards buyout, Defined Contribution (DC) managed funds reducing weightings to the UK, and by Local Government Pension Schemes reducing UK weightings (some have been slower to transition to global portfolios than others).  

This trend to globalisation of portfolios not only starves UK companies of investment, but particularly impacts on UK small & midcap companies given that typically funds globalise into large companies (as seen from the Nest portfolio).

All of this means that the current government’s decision to require DC funds to identify their UK positions by 2027 cannot come soon enough and should be accelerated by a new government. In addition, the suggestion that further action will be taken if investment in the UK is not stepped up is so important. It may make sense for an individual fund to globalise, but collectively it is disastrous for UK investment, capital markets, GDP growth and tax revenues. In our view, there are several measures that a new government could look at for DC schemes:

• Accelerating the timetable to declare UK allocation.
• Mandating a minimum exposure to UK assets.
• Consolidating schemes to drive scale advantages and greater risk appetite.
• Increasing contributions from the current level of 8% to 12%+ over time.
• Enable workplace schemes to offer an enhanced UK allocation option.
• Provide dividend tax relief for investment in UK shares in pension schemes.
• Mandate minimum UK exposure for SIPPS to gain full tax benefits.
• Focus on returns rather than costs.
• Introduce requirement for performance rather than focus on risk.

 

Labour Party Manifesto on pensions

“Labour will also act to increase investment from pension funds in UK markets. We will adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC. We will also undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets.”

This looks a continuation of the current government’s move to change the dynamic of pension funds reducing allocation to the UK, which has done lasting damage to pension schemes, impacted on UK economic growth, and reduced UK tax revenue. Furthermore, Labour may look to move further in terms of speed and scale of change. The Mansion House Compact and the spotlight on UK equity holdings is just for starters. We see changes in pension allocation as the start of a fundamental enhancement in UK investment, growth and market performance.

MPs’ pensions – opportunity to set an example

The MPs’ pension fund (the Parliamentary Contributory Pension Fund - PCPF) is a good example of the impact of globalising the portfolio. At its peak, the fund held £130m in UK equities. At the last year-end, this had reduced by 92% to only £10m. This represents a 1.3% weighting to UK equities of the total funds and 2.3% of the equity portfolio. This means that not only has the fund sold down its UK holding to a very low level, but also that it is materially underweight vs the UK’s share of global equities (3.7% according to MSCI). We suspect that most MPs would be astounded that their pension contributions support overseas companies rather than growing UK companies.

The following chart shows the move in the portfolio since it changed to a contribution scheme in 2015.

 

Figure 2: PCPF allocation to UK equities

Source: PCPF annual reports

 

Overall the fund has moved from a 65% weighting in equities in 2016 to 56% in 2023 (details below), but the overall weighting to global equities has increased materially over the period.

The MPs’ fund is in an accounting surplus and was valued at £780m at the end of March 2023. If the fund moved to a 10% weighting in the UK, it would increase the holdings by £68m. If it moved to the average weighting that the Australian pension schemes operate at (c.23%), it would increase the holdings by £146m.

If schemes such as these invested in the UK, we would see an improvement in domestic asset performance combined with stronger GDP and higher tax revenue, which is essential to pay for our public services over the long term. If they choose to fund overseas companies instead, then it is not remotely surprising that the UK economy has pedestrian growth and falling GDP per capita. Reversing this would show real intent to focus on domestic growth and be a strong example for other schemes to follow.

The data below shows the composition of the fund. The investment performance is shown in the table. The fund is typical of many in the UK. The performance looks reasonable until it is compared with international peers. Over the past five years the investment performance is 5.5%, which compares to its own benchmark of 6.3%.

 

Details of the PCPF scheme can be found here.

Figure 3: PCPF allocation and performance

2016 2017 2018 2019 2020 2021 2022 2023 Assets (£m) 585.7 665.3 671.0 698.3 633.3 772.6 835.7 785.9 Liabilities (£m) 817.4 941.5 887.3 957.0 908.3 1016.2 1040.1 741.5 Surplus (£m) -231.7 -276.2 -216.3 -258.7 -275.0 -243.6 -204.4 44.4 Funding level (%) 72 71 76 73 70 76 80 106                   UK equities (£m) 110.4 130.5 118.5 85.0 71.4 90.5 14.3 10.0 Overseas equities (£m) 270.6 340.0 303.3 365.6 307.2 422.4 499.2 433.0 Total equities (£m) 381.0 470.5 421.8 450.6 378.6 512.9 513.5 443.0                   % allocation                 UK equities (%) 18.8 19.6 17.7 12.2 11.2 11.7 1.7 1.3 Overseas equities (%) 46.2 51.1 45.2 52.4 48.3 54.6 59.8 55.3 Total equities (%) 65.1 70.7 62.9 64.5 59.5 66.3 61.5 56.5                   Investment performance (%) -1.1 22.1 3.4 7.4 -7.3 26.0 10.7 -4.6 Benchmark (%)   21.2 3.6 6.3 -4.0 21.9 10.4 -1.1                   Infrastructure           3.8 9.5 39.9 Property (£m) 48.4 54.9 68.2 71.6 70.3 70.2 83.2 67.5 Bonds/debt (£m)   133.5 163 168.3 147 170.4 209.1 215.8 Cash (£m) 15 6.4 17.8 7.5 40.1 16.7 19.5 17.3                   Infrastructure (%)   0.0 0.0 0.0 0.0 0.5 1.1 5.1 Property (%)   8.3 10.2 10.3 11.1 9.1 10.0 8.6 Bonds/debt (%)   20.1 24.3 24.1 23.1 22.0 25.0 27.5 Cash (%)   1.0 2.7 1.1 6.3 2.2 2.3 2.2 Total (%) 65.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: PCPF annual reports