UK pension funds need to start pumping cash into London’s stock market “fast”, the City minister will say today, in another warning shot at the sector as government tries to channel a wave of cash into the City.
In a speech to think tank Bright Blue, the economic secretary to the Treasury, Bim Afolami, is expected to say a dearth of investment from pension funds into UK-listed companies is a “challenge” the UK needed to solve if it is to restore the appeal of its public markets.
The comments underscore growing frustration in government after Chancellor Jeremy Hunt threatened pension money managers with “further action” in his March budget if they did not boost their allocation to UK equities.
Pension cash is seen as key to reviving the UK’s stock market after a drop off in investment over the past two decades. Around four per cent of the London-listed shares are now held by pension funds, a sharp drop-off from the 39 per cent held at the turn of the millennium.
“First, we have a challenge – [pension funds] don’t invest enough in the UK – and this needs to change, fast,” Afolami will warn.
The government will also look to accelerate efforts to consolidate the UK’s sprawling pension market in an effort to boost the size of cumulative funds. “[The] market is currently far too fragmented,” Afolami is will say.
Ministers and regulators have been exploring ways to unlock investment from retirement funds over the past two years, with Hunt announcing in March that domestic funds would be forced to publish the geographic make-up of their portfolios by 2027. Under the plans, underperforming schemes will also be blocked from taking on new members.
The Pensions Regulator and Financial Conduct Authority are also set to be granted more powers to ensure better value from so-called defined contribution schemes.
“I will introduce new requirements for [defined contribution schemes] and local government pension funds to disclose publicly their level of international and UK equity investments,” Hunt said in March.
“I will then consider what further action should be taken if we are not on a positive trajectory towards international best practice.”
Labour’s shadow Chancellor Rachel Reeves has previously floated the idea of forcing pension funds to allocate five per cent of their assets to UK equities.
A dearth of investment into the London Stock Exchange has been blamed for the lacklustre valuations of London-listed companies and a drop off in IPOs over the past two years. The City was hit by the worst listing drought since the financial crisis last year as just 23 firms floated on the London Stock Exchange, raising under $1bn.
Efforts to push pension funds to invest more in London have unsettled some in the pension industry, however, who claim they should invest in the interest of members rather than the health of the UK stock market.