Let’s end pension gilt trip
THE UK has one of the most highly developed pension and insurance systems on the planet, with around £5trillion of assets. This ought to provide the economy with a huge advantage: a bedrock source of capital for companies and infrastructure projects.
As long-term investors, UK pension funds should be underpinning the stock market.
Last week, I argued here that unleashing pension savings and channelling them into productive investments could reboot the economy. For that to happen, the pensions establishment needs a major mind-shift.
To understand what is happening now, we need to embark on some brief time travel.
After World War II, retirement funds held practically all their assets in bonds. Then in the mid-1950s, there was a huge shift in pension investment policies here and in the US, called ‘the cult of equity’.
Enter 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 shares, then a revolutionary move.
Funds moved wholesale out of gilts – IOUs to the Government, considered to be lowrisk – and into the stock market, where risks and returns were higher.
The shock of Robert Maxwell’s pension fund theft led to a desire to reduce risk. When New Labour came to power in 1997, then chancellor Gordon Brown launched a tax raid that dealt a hammer blow to the value of schemes. Fast-forward to the financial crisis when the wave of QE moneyprinting increased the size of deficits in many pension schemes. Revamped accounting rules meant the gory detail had to be published in annual reports, for all to see.
In the past couple of decades, the cult of equity has been extinguished and the cult of gilts is back in a big way.
Figures from the Pension Protection Fund show that in 2008, final salary schemes had more than half of their assets in equities. By 2021, that had fallen to under a fifth.
OFthe total equity investment, the proportion in the UK stock market dropped from just under half in 2008 to a smidge over a tenth in 2021, with a big increase in the amount invested on foreign stock markets.
All the statistics point to the same conclusion: billions of pounds of pension fund money has drained out of the UK stock market and been channelled into gilts.
The cult of the gilt has been re-establishing itself inexorably since the 1990s. Ironically, the obsession with risk avoidance meant pension funds locked into low returns from government debt. Doing so has had a high opportunity cost: they have deprived members of the higher rewards that might have come from backing businesses and infrastructure investment.
Productivity has been hurt as a result. Worthwhile businesses have been starved of a potential source of capital.
The ownership profile of many of the bestknown companies listed on the UK stock market has changed, and not necessarily for the better, with more overseas investors and hedge funds on share registers.
UK pension funds could play a valuable role in responsible long-term ownership and good governance, if they had not sold out.
The ties binding the UK capital markets and financial services to British industry are being eroded. Companies such as Ferguson, Flutter, CRH and Arm have given the cold- shoulder to the City. Others, including supermarket group Morrisons and Cambridge software group Aveva have succumbed to overseas takeovers.
Gilt-tripping has had unintended consequences. It’s time for a big re-think.