Retirement wave flattens pension funds' exposure to UK equities, warns Goldman Sachs

Goldman Sachs (Goldman Sachs) warned that with the pension funds to meet the retirement tide to sell assets, British companies will face the risk of lack of investment.

Analysts at the Wall Street bank sounded the alarm about flat investment levels in the UK after research found that the UK's final salary scheme sold off almost as many UK stocks as other pension funds bought in.

This means that UK plc receives a net investment of just £500 million a year from pension funds.

Goldman Sachs says the defined benefit (DB) scheme - which pays a fixed income but is largely closed to new savers - sells £2.5bn of shares every quarter which are used to pay pensions to retirees.

Meanwhile, defined contribution (DC) pensions - which do not guarantee a guaranteed income but depend on the performance of the financial markets - bought £3 billion of shares over the same period.

However, the vast majority of this net investment went into foreign equities, with only a quarter going into UK equities.

Goldman Sachs said that in the 1990s, the Final Salary Scheme owned half of the UK stock.

In contrast, after years of shifting funds to bonds, real estate and other assets considered less risky, these plans now hold only $3%.

DC plans typically have a larger share of equity investments than the shrinking DB plans, which are growing in number.

However, the Goldman Sachs report warns that this does not mean that UK equities will be boosted in the coming years.

Even if DC funds - which tend to allocate more to equities - were to become a major part of the pension fund, we would still see a lack of [demand] for domestic equities from this source," said analyst Sharon Bell.

"Changing this will require incentives to use these assets for UK investment, as well as providing a compelling stock market growth story. This is partly a circular argument, of course; domestic investors/ownership is needed to deepen the capital markets and encourage new companies to come to market.

The government is trying to tackle the problem with a range of new policies, including a UK ISA that allows savers a greater tax allowance when investing in UK-listed shares.

Jeremy Hunt, the Chancellor of the Exchequer, said the ISA's additional £5,000 allowance would "ensure that UK savers can benefit from the growth of the most promising British businesses by providing them with the financial backing to help them expand their operations".

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