abrdn found that more than half (54%) of people would like their pension to have a greater allocation to private assets, such as housing schemes, infrastructure projects, and early-stage growth companies. Only 14% said they would not want this, while 32% were not sure.
Similarly, the majority (57%) of people would like their pension to include a higher percentage of UK company shares. However, for 42% of people, that was on the proviso that investing more in the UK does not impact returns.
While it is positive that the public supports pensions money funding domestic growth projects, this surely necessitates a national conversation about the trade offs between risk-taking and reward. abrdn’s research also showed that the majority (53%) of people have a low investment risk tolerance - meaning they would be willing to accept little to no volatility in their investment portfolio.
abrdn has been calling on the Government to foster a UK ‘Savings Ladder’ culture. By encouraging a national culture of saving and investing, policymakers could boost capital markets, help to solve our low productivity, and reduce our reliance on foreign investment. If people are to engage with pensions and investing, we believe that we need a broader cultural movement.
abrdn is advocating for the Government to take a “carrot not stick approach” to pensions investment reform – encouraging reallocation of capital via financial incentives rather than mandate pension funds to change their investment strategies. It also believes that a certain level of consolidation should help to ensure capital can be channelled into productive growth areas.
"As our research shows, the public generally supports the idea that their pension savings could go towards powering UK business as well as the housing and infrastructure projects we so badly need. However we urge policymakers to take a 'carrot not stick' approach. "
Head of UK Institutional & Global Solutions, UK Client Group at abrdn
Thomas added: "Mandating that pension schemes invest in specified assets or otherwise constraining investment choice would significantly interfere with their ability to meet the scheme’s objectives and deliver value for pension savers'.
For corporate defined benefit pension schemes, we believe some level of consolidation would support greater investment into these productive growth areas. There is a very long tail of small schemes that have neither the scale nor the expertise to make investment decisions on anything but the most “vanilla” of assets. Consequently, consolidation is necessary to enable schemes to grow to a scale which enables investment in a wider range of assets with a greater appetite for rewarded risk.
However, there are risks which could arise in an over-consolidated market. If the number of schemes is reduced to too low a number, this could limit innovation and lead to decreased competition, thereby resulting in poorer outcomes for current and future pensioners. It could also limit the Government’s ability to identify good practice and encourage its adoption elsewhere.”
Incentives to encourage reallocation of capital could include:
- A proposed Value for Money framework that encourages a re-interpretation of costs and the charge cap for defined contribution schemes
- Fiscal incentives, including tax reduction or exemption for investments in productive finance
- Underwriting or guaranteeing minimum investment returns
"By encouraging pension funds to invest more in private markets, we have the potential to deliver better long-term returns for savers – all while supporting the UK growth story by channelling funds into productive areas, from tackling the housing crisis to delivering cleaner energy."
Nalaka De Silva, Head of Private Market Solutions at abrdn
Channelling capital into areas that are “close to home” for people – i.e. tangible assets like housing or railway projects or UK business – could also help to improve engagement with pensions, as people will feel they are benefiting from the investments made by their pension funds.”
A recent report by New Financial, in partnership with abrdn, found that allocations to UK smaller companies by UK pension funds have collapsed in recent years. It found only one Local Government Pension Scheme (LGPS) fund with a specific allocation to UK listed smaller companies – compared with 18 back in 2013.
The report also demonstrated the huge amount that listed smaller companies add to the UK economy, as well as the strong returns they have delivered for investors over the long-term – albeit with volatility along the way.
Findings included:
Listed smaller companies are much more evenly distributed across the UK than FTSE 100 or FTSE 250 companies - generating growth and jobs across almost every corner of the country
- They have combined revenues of £169bn and employ around 1.1 million people in the UK and overseas.
- Over the 25 years to the end of 2023, the cumulative total return on UK smaller listed companies was over 500% - nearly double the performance of the wider UK market and in line with the S&P500. However, past performance is no guarantee of future returns and in recent times smaller companies have been more challenged.
Therefore, abrdn argues that investing in listed smaller companies would align with the Government’s aim of allocating pension capital to productive areas that could support domestic growth.