UK equity fund managers are calling for an overhaul of pension accounting rules to revive investor interest in London-listed shares, as a swath of companies prepares to depart or shun the City for US stock exchanges.
Richard Buxton, UK equity fund manager at Jupiter, and David Cumming, head of UK equities at Newton Investment Management, said a two-decade-old rule requiring companies to hold pension deficits on their balance sheets needed to be swiftly removed.
The requirement triggered a big shift among pension funds out of the stock market into portfolios composed largely of bonds, shrinking the domestic base of equity investors and sapping demand for London-listed stocks, the managers warned.
While the underperformance of UK stocks relative to their US peers stretches back to the financial crisis, a recent slew of companies planning to ditch their London listings in favour of New York has given renewed urgency to investors’ concerns over the health of the market.
In the past two weeks, the world’s largest building materials maker CRH and SoftBank-owned chip designer Arm have shunned the UK for US listings. Software group WANdisco is also looking to list in New York in addition to its London listing, and Anglo-Dutch energy group Shell explored quitting Europe and moving to the US.
“The news that Cambridge-based Arm is shunning London for a listing in New York, coupled with the intention of buildings materials giant CRH — which I own — to shift from London to New York has raised again the existential threat to the City as a pool for savings, investment and asset management,” Buxton said.
“The UK with its world-class universities has enormous opportunities in life sciences, engineering, carbon capture and storage, nanotechnology and IT. But we appear incapable of funding these businesses or retaining them to grow in this country.”
Buxton said the requirement for deficits to sit on company balance sheets was responsible for “billions of pounds” flowing out of UK equities and “must be dropped”.
The accounting change in 2000 pushed many companies, suddenly liable for any deficits, to close their defined benefit schemes. These promise to pay their employees’ pensions at a fixed level, sometimes tied to their final salary.
With no new members joining these schemes, companies became focused on managing their liabilities to remaining members, which could move up and down dramatically with changes in interest rates. To manage the risk, many schemes adopted so-called liability-driven investment, which aims to offset such swings by investing heavily in long-term government bonds. LDI, which also uses derivatives to hedge against moves in long-term interest rates, was at the centre of last year’s UK bond market crisis.
The portion of British pension and insurance funds’ portfolios in UK-listed equities has fallen from about half to 4 per cent over the past two decades, according to data from investment bank Ondra Partners.
Cumming at Newton said: “Momentum in the UK is currently going the wrong way. CRH saying it’s moving to New York and then shares jumping by more than 10 per cent is not a good sign.
“The accounting rules and other factors that are pushing investors into bonds over equities need to be changed.”
He added that regulations forcing insurers to assign higher-risk weights to stocks compared with bonds were also holding back investment.
Sir Douglas Flint, chair of asset manager Abrdn, said money going into UK equities was declining because the amount flowing into defined contribution schemes was “significantly below” the amount that historically went into the defined benefit schemes they have largely replaced.
“Defined contribution schemes are also cautious on risk, so another reason why there’s not much going into UK equities,” Flint said.
He added that the UK stock market was “old world”, focused on oil and gas, mining and banking. “There are very few of the technology companies [of] the future. So if London wants to compete for the next generation investor, we need to unlock the science and innovation base that the UK possesses.”
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