New research from the PPI shows a complex, dynamic picture of UK asset allocation, while Nest estimates that it will invest £20bn in the UK by 2030.
In a detailed study, the PPI has attempted to analyse investment data across multiple types of schemes and to drill down into “productive finance” allocations and UK-specific investments.
“Although the high-level picture suggests a move away from equities and a move away from UK investments, it is evident that the shift is far more complex than these two high-level changes suggest,” the PPI’s report stated.
“To understand the direction of travel in asset allocation, it is necessary to understand the drivers of change and the way in which they are affecting different parts of the UK pension sector.”
The demographics of individual pension schemes, their size and profile, the cost and accessibility of different asset classes, policy changes, and responsible investment approaches are all affecting how schemes allocate to the UK and to productive finance, the PPI found.
How much do schemes invest in the UK?
Earlier this year, former chancellor Jeremy Hunt cited data from New Financial that showed pension schemes’ allocation to UK equities had fallen to just 6% of overall portfolios.
Research from the Resolution Foundation published last year reported that UK pension schemes had limited engagement with domestic companies. Its data showed that just 2% of assets in defined benefit (DB) and defined contribution (DC) schemes were allocated to directly held UK equities.
These and other data points have been used by the previous government and the new administration to push for greater allocations to “productive finance”, with the aim of putting more capital to work within the UK and – it is hoped – boosting economic output.
However, the PPI highlighted that data across the full spectrum of schemes was “patchy and inconsistent”.
It estimated that, while DB and trust-based DC schemes often published high-level asset allocation information, much less was known about allocations to “productive finance” or UK-specific allocations. There was also a dearth of information about contract-based arrangements such as group personal pensions.
In a new report, Nest – one of the country’s biggest DC master trusts – has set out details of its estimated £8.5bn allocation to UK assets, including to renewable energy firms, logistics infrastructure and real estate.
It estimated that, due to its expected growth and long-term asset allocation plans, its UK investments will reach £20bn by 2030.
Mark Fawcett, CEO of Nest’s in-house asset management unit, said: “Pension funds should be looking hard for UK investment. One of the world’s biggest economies is right here on our doorstep and it’s an attractive place to do business. It allows us to support local businesses and infrastructure projects, fostering economic growth and job creation.
“Investing in the UK aligns our investment strategy with our long-term goals of sustainability and stability, ensuring that our members’ pensions are secure and contributing to the world they will retire into.”
‘Nailing jellies to a wall’
In its introduction to the report, the PPI said: “Mapping the assets of the UK pensions sector is like trying to nail 20 jellies to a wall and trying to make one simple picture from the mess. UK data is slippery, fragmented, inconsistent and incomplete.”
The institute called for government and regulators to “ensure consistent definitions of asset classes that are comprehensive and that avoid duplication”.
To do so, the PPI said policymakers would have to work closely with regulators, trade bodies, research organisations, data collectors, media and the wider pensions industry “to achieve common definitions and understandings”.
The PPI also acknowledged that there was “no single definition of what constitutes productive finance”, despite how prominent the phrase was in government communications, but cited a 2016 paper from the Bank of England to describe it as “essentially investment that supports economic activity”.
Using a broad definition of UK productive assets, the PPI estimated that 18% of the £3trn held in pension schemes was invested in this way. This included listed equity, private equity, corporate bonds and alternatives.
Focusing on private equity and alternatives alone, the proportion dropped to 6%.
Further reading
Railpen unveils real assets investments across UK (26 August 2024)
UK pensions: Scaling for success (12 August 2024)
Savers support UK investment drive – if it boosts performance (7 August 2024)
