24 October 2024
If you are covering the latest financial and market news, please find below a comment from Lindsay James, investment strategist at Quilter Investors:
"Comments from Andrew Bailey yesterday at the Institute of International Finance acted as a reminder that further reform may lie ahead for the UK pension sector, potentially in the form of consolidation of the 27,000 DC schemes currently available. Describing the UK pension industry as ‘fragmented’ and saying it ‘isn’t investing in the UK real economy’, Bailey raised an issue that is likely to be increasingly in the crosshairs of Rachel Reeves.
"With around 80% of UK investment typically funded by business, as opposed to the state, the low level of investment by listed UK companies, often in favour of share buyback schemes or higher dividends, could be blamed on the fragmentation of ownership. Meanwhile, DB and DC schemes have collectively reduced their holdings to around only 2% of assets.
"Active investors well understand the merits of long-term investment in a company, with Warren Buffet offering a litany of quotes on the topic such as “if you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”. However, the reality is that in recent years the rise of both passive investing and short-term trading strategies, combined with the shift in ultimate ownership, has meant management are often focussed more on the short-term share price rather than the long-term sustainability of growth. With the latter requiring investment, but the former boosted by share buybacks and higher dividends, companies are no longer the same force in real economic growth that they once were.
"While proposals to force UK pension funds to invest in UK equities would be a bad idea, something Andrew Bailey acknowledged, the likelihood of future pension fund consolidation seems high. We could see a replacement of the myriad of small schemes with larger entities that can be active owners. This would be much like the way that international schemes such as Ontario Teachers’ Pension Plan has a stake in Birmingham airport and owns outright assets such as White City Place, the former home of the BBC.
"With investment the key to unlocking higher productivity and higher growth in the UK, the link must be re-formed between listed UK assets and real economic growth."
