UK pension funds have drastically cut their exposure to equities in their home market over the past 25 years, sucking out a whopping £400 billion of demand, according to a new report, adding to a deep valuation discount that is making London increasingly unattractive for listings.
(Bloomberg) — UK pension funds have drastically cut their exposure to equities in their home market over the past 25 years, sucking out a whopping £400 billion of demand, according to a new report, adding to a deep valuation discount that is making London increasingly unattractive for listings.
UK pension funds reduced their allocation to stocks from about 73% in 1997 to 27% in 2021, cutting exposure to British equities from 53% to just 6% over the same time period, think tank New Financial said in a report prepared for the Capital Markets Industry Taskforce.
The taskforce led by Julia Hoggett, chief executive officer of the London Stock Exchange, was announced in July to identify ways to make the most of capital markets reforms to attract new company listings, adding to a slew of UK government measures including proposed rule changes to ease companies’ access to capital markets.
While removing such barriers for issuers is important, the root of the problem is a structural shift away from UK equities, according to the New Financial report. Since 2000, the share of the UK stock market owned by UK pensions and insurance companies has fallen from 39% to 4%, and just 1% of the £4.6 trillion in pension and insurance assets is invested in unlisted UK companies, the report showed.
This shift in asset allocation is partly because of an accounting change in 2000 that forced companies to recognize pension fund deficits on their own balance sheets.
As more and more defined-benefit pension programs — which are aimed at keeping employees’ retirement payments at a fixed level — closed to new members and the age profile of their existing members matured, funds starting selling equities and piling into bonds to better match their long-term liabilities. What equity exposure was left shifted to higher-returning overseas stocks.
The reduction in demand for UK equities caused by the shift in allocations “risks creating a self-fulfilling downward spiral: selling by UK pensions and insurance companies reduces valuations, which reduces the weight of the UK in global indexes, which reduces demand, which reduces valuations,” New Financial said.
The UK’s valuation discount to other global markets such as the US is having a marked impact, with the likes of Softbank Group Corp.’s Arm Ltd., a jewel of Britain’s technology industry, deciding to list in New York, despite the UK governnment’s persistent lobbying.
Such departures are especially painful at a time when initial public offerings have all but disappeared. This year, only two tiny companies have floated in the City, raising just about $7 million, marking the worst quarter for the global financial capital in two decades, according to data compiled by Bloomberg.
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