When the body of newspaper magnate Robert Maxwell was found floating in the waters off the Canary Islands in November 1991, his mysterious death brought media destruction his family's empire. In the weeks and months that followed, it also meant the end of the British pension era.
After the 68-year-old died, it emerged that £460m had been fraudulently embezzled from the Mirror Group pension. a fund to support Maxwell's debt-laden companies.
Criminal revelations helped greatly increase the bureaucratic red tape in the pension industry during the 1990s, making funds more risk averse and reducing their exposure to the stock market and early stage companies.
Well-intentioned rules now govern every aspect of investing savers' money, from strict accounting rules to restrictions on the types of assets that can be held.
The result, let's say of criticism, has been economic stagnation and foreign ownership of some of Britain's best companies, punctuated by the constant drumming of pension scandals — from British Steel to BHS — that no crackdown has been able to prevent.
On the other hand, the industry is waiting for the deployment of billions of pounds of capital. The reform could spark a £4.6 trillion wave of investment in the industry and help speed up the UK economy's recovery.
Michael Eakins, chief investment officer at FTSE 100-listed pensions company Phoenix Group, says red tape cuts will create an environment where new companies can be «founded in the UK, designed in the UK and registered in the UK», which will boost the economy and job creation.
2305 UK Pension Fund Allocation
Eakins adds that the Maxwell saga «led to a lot more control over what pension funds could invest in.»
«Over the past two to three decades there has been a consistent and persistent de-equitalization of UK pension funds and insurance companies and this is a major concern,» he adds.
the UK economy as a place where companies want to come, start and grow.”
The data speaks for itself. Between 1997 and 2021, UK pension funds reduced their holdings in UK equities from 53% to just 6%, according to a recent report from think tank New Financial. And since the turn of the century, the share of the UK stock market owned by British pensions and insurance companies has also collapsed from 39% to 4%.
Nigel Wilson, Executive Director of Legal & General (L&G), the UK's largest pension fund manager, blames the deequitation on new accounting rules introduced after Maxwell's death and Gordon Brown's decision to levy higher taxes on dividends.
In 2000, a new accounting standard known as FRS17 required companies to report the market value of their pension funds on their balance sheets.
2305 Real Value of UK Pension Fund Assets
Frightened by the size of the reserved pension obligations, boards have rushed to close many defined benefit or last pay schemes and switched their investment strategies from equities to low-yielding and less risky government and corporate bonds.
A New Financial report shows that UK pension funds have quadrupled their holdings in bonds to 56% over the past 25 years. The move to bonds heralded a new era of liability-based investing (LDI), which was seen as a safe and sound strategy until Kwasi Kwarteng's ill-fated «mini-budget» last year sent debt prices plummeting. some pension schemes are on the brink of collapse.
Meanwhile, in Brown's first budget in July 1997, the then Labor chancellor raided the pension schemes, cutting the 20 percent dividend tax credit they were previously entitled to.
«These events combined have really reduced risk appetite and significantly increased regulatory oversight of the UK pension industry,» says Wilson.
New rules have been introduced in the aftermath of the Maxwell scandal
Hendrik du Toit, chief executive of FTSE 250 asset manager Ninety One, agrees, adding that the UK has done itself a disservice by adding more regulation in addition to EU rules, such as a new obligation to protect consumers, as well as avoiding investment risk. .
Not all countries have adopted the UK's more conservative approach. Canadian and Australian funds have gained more freedom from their national regulators to invest in higher risk asset classes such as listed and early stage companies, venture capital and private equity.
The results were generally positive. The Ontario Teachers' Pension Plan (OTPP), a defined benefit program that enrolls more than 330,000 public teachers, increased its investment by 4 percent last year despite turmoil in global markets.
Wilson says: «Australia and Canada have been ahead of us for a long time, while in the US the culture is very stock-oriented.
1504 British Pension Funds Lagged Competitors
“We became obsessed with housing [as an asset] in the 60s and 70s and somehow thought house price inflation was a good thing. But we never created this culture of justice. So we've made housing attractive, but pensions dull.»
He also laments a certain amount of inertia in the UK regarding savings and investment, noting that of L&G's nearly five million defined contribution clients, only about 1,000 change their portfolios each month.
Both Wilson and Eakins are calling for cultural changes to take more risk in the UK pension industry.
Among the reforms they hope to see are giving pension funds a «soft» mandate to invest a certain percentage of their capital in growth stocks and infrastructure, and removing performance rewards from capping pension contributions.
Phoenix's Eakins says: “The charge cap means you can't invest in strategies that have an element of performance-related fees. This prevents savings and retirement providers like Phoenix from investing in asset classes like venture capital or early-stage growth capital.
2305 Percentage of UK shares held by UK pension and insurance companies
“If you take a time horizon of several decades, the allocation of venture capital and private equity is absolutely appropriate. These asset classes have a clear track record of paying out excess returns over the long term. But the current regulatory regime has prevented us from gaining that access.”
Jeremy Hunt, the chancellor, did not rule out telling funds where they should invest some of their capital, but said he «instinctively doesn't like» the idea. And not everyone in the industry is interested in it.
Morten Nilsson, Chief Executive of BT Pension Scheme (BTPS), one of the UK's largest private sector pension schemes, which has recently been renamed Brightwell, says: “Pension schemes must be free to invest in the best possible way to meet the needs of the scheme's participants.
«Trustees are accountable to members and must select the most appropriate investments regardless of geography.»
Hunt is gearing up for the fall to announce pension reforms that will likely include plans to consolidate the fragmented industry to bring it more in line with Canada's.
Nilsson says the sector is ripe for deals, adding: “There are a number of benefits to having fewer large funds. Larger funds have more purchasing power, more experience and can often take on more risk.”
The Chancellor is expected to be increasingly focused on the UK's 28,000 defined contribution schemes, where clients' pension incomes depend on the performance of the scheme's investments.
Experts argue that the decline of the UK markets is inextricably linked to its inability to capitalize on its sizable pension industry.
London has struggled to hold on to tech darlings like Cambridge microchip developer Arm, which announced earlier this year that it would snub the London Stock Exchange in favor of New York.
2305 UK stocks hit
Wilson, who was commissioned by the Capital Markets Task Force to produce a report on how to make London more globally competitive, says: “We missed the tech bubble in 2000 when many great modern companies were created and expanded. . America ended up with a huge number of scalable enterprises, and we didn’t have them.
“We have so many startups — the degree of entrepreneurship in our universities is off the charts. However, we don't have a capital system designed to make these people succeed like they do in the United States.»
Wilson concludes that Britain needs to be more ambitious and aim higher than being more attractive than the European Union.
He says: “To be better than in Europe should not be a benchmark. There is no European capital market equivalent to New York, London or Hong Kong, so we have to make [the system] function much better.
«We have to compete globally and the UK and London are falling behind.»
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