Wave of retirees to hit UK stocks, warns US bank

BRITISH businesses risk being starved of investment as pension funds sell off assets to meet a wave of retirement claims, Goldman Sachs has warned.

Analysts at the Wall Street bank have sounded the alarm over investment levels flatlining in the UK after research found final salary schemes are selling almost as many British stocks as other pension funds are buying.

This has meant that Uk-listed companies are receiving just £500m in net investment from pension funds each year.

Goldman Sachs said defined benefit (DB) schemes – which pay a fixed income but are largely closed to new savers – are selling £2.5bn of shares per quarter to pay out pensions to retirees.

Over the same period, defined contribution (DC) pensions – which do not guarantee a specific income but depend on performance of financial markets – are buying £3bn of equities.

However, the vast majority of this net investment is ploughed into foreign shares, with only a quarter diverted to British stocks.

In the 1990s, final salary schemes owned half of all UK shares, Goldman Sachs said. By comparison, they now hold just 3pc after years of transferring funds to bonds, property and other assets deemed to be lower risk.

DC schemes, which are growing in number, typically put a greater share of their investments in equities compared with DB schemes, which are shrinking.

The Goldman Sachs report, however, warned that this does not mean British shares should expect a boost in the coming years.

Sharon Bell, an analyst at the bank, said: “Even if DC funds – which tend to allocate much more to equity – become the dominant part of the pension pie, we might still find a lack of [demand] for domestic stocks from this source.

“Incentives to capture these assets for UK investment, along with a compelling equity-market growth story, would be needed to change this,” she said.

“Of course, this is somewhat circular; there is a need for domestic investors/ ownership in order to deepen the capital market and encourage new companies to list.”

The Government is trying to address this with a range of new policies, including a British Isa that allows savers a bigger tax-free pot if they invest in Uk-listed shares.

The Treasury said: “Government reforms are delivering a plan for long-term growth of the economy including unlocking up to £75bn from pension funds and encouraging DC funds to reach 5pc investment in unlisted UK equities.”