Compelling UK pension schemes to disclose their investment in British businesses may contradict the government’s focus on investment performance in its new Value for Money framework for defined contribution (DC) schemes, according to a research paper by the Society of Pension Professionals.

In the Spring Budget, Jeremy Hunt, teh UK’s chancellor of the exchequer, announced that DC schemes would be required to disclose their levels of investment in UK equity, as well as their costs and net investment returns by 2027.

These plans build on the government’s Mansion House Compact, which encouraged pension funds to invest at least 5% of their assets in unlisted UK equities.

In response, SPP published a short paper raising several questions about these plans.

It highlights that each of the main pension providers, covering over 15 million UK pension savers, already disclose their UK investment and have done so for several years. The results confirm that those with higher UK equity weightings have typically underperformed those who have little or no exposure to the UK market.

The SPP said this is reinforced by the fact that the FTSE All Share Index (made up of approximately 600 UK stocks) grew by 63% between 31 December 2013 to 31 December 2023, whereas the MSCI World Index has produced cumulative returns of 215% over the same 10-year period.

While acknowledging that past performance is no guide for the future, the SPP questioned in its report Best of British? whether compelling schemes to disclose their investment in British businesses may contradict the government’s focus on investment performance in its new Value for Money framework for DC schemes.

It also questioned whether pension funds should invest in British businesses when knowing that such investment may produce worse returns than investing overseas.

Amanda Small, a member of the SPP DC committee, said: “The SPP appreciates policymakers’ ambition to unlock capital for UK companies, but the 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.”

She said that the additional disclosure obligation will not drive the right behaviours and achieve trustees’ overarching objective, which is to provide good outcomes for members.

Small added that 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,” she noted.

PMI pulse survey

But according to Pensions Management Institute’s (PMI) Pulse Survey, which surveyed 119 pension professionals, it showed that only 31% of respondents believe that the Mansion House reforms, which will require the schemes to increase their investment in British businesses, will be effective.

A majority (61%) of respondents expressed doubt that the Mansion House reforms will lead to expected increase in investment in UK productive assets, and only 31% believe the reforms will have enough cross-party support to be fully implemented in an election year.

As a result, only 43% of respondents believe the reforms will become embedded in UK pensions policy.

Read the digital edition of IPE’s latest magazine