The Society of Pension Professionals (SPP) has raised concerns about the government’s proposal to make pension funds invest in UK equities, highlighting the underperformance of funds heavily invested in UK stocks compared to those with less exposure.
The government’s Mansion House compact, which proposes investing at least 5 per cent of total assets in unlisted UK shares, is in line with the Spring Budget’s mandate that Defined Contribution (DC) pension funds reveal their investments, expenses, and net returns in British businesses by 2027.
In a short paper published today, SPP cited Corporate Adviser’s Master Trust & GPP report which shows that major pension providers, serving more than 15 million pension participants in the UK, have long disclosed their UK investments. Results show that investors with large holdings in UK stocks typically do worse than investors with less exposure to the UK market.
SPP also highlights divergent performance measures, pointing out that the FTSE All Share Index, made up of around 600 UK stocks, grew by 63 per cent between 31 December 2013 to 31 December 2023 while the MSCI World Index has produced cumulative returns of 215 per cent during the same period.
The paper raised concerns about whether requiring disclosure of investments made by British companies is consistent with the government’s Value for Money framework for DC schemes, particularly given that these investments often have lower returns than alternatives made abroad.
SPP also expressed worries about the trustees’ discretionary powers being undermined and the members’ best interests being neglected.
SPP DC committee member Amanda Small says: “The SPP appreciates policymakers’ ambition to unlock capital for UK companies, but Government must be careful that a new reporting obligation like this does not inadvertently channel DC schemes’ investments into UK-centric asset classes that currently neither reflect a robust investment case or meet trustees’ requirements for diversification, sufficient risk-adjusted returns and avoidance of concentration risk.
“This additional disclosure obligation will not drive the right behaviours and achieve trustees’ overarching objective, which is to provide good outcomes for members.
“If the Government wants to encourage greater investment in UK companies then these companies need to offer better risk-adjusted investment returns. Ultimately this is the key driver of trustees’ investment decisions.”
The post SPP raises underperformance concerns over UK equities investment proposal appeared first on Corporate Adviser.
