.jpg)
It’s been another week of news focused on Trump and the Ukraine, with Prime Minister Starmer promising to increase his UK defence budget before he headed over to the US to see Trump himself. I am sure you will have read plenty on this matter yourselves, so I will return to one of my favourite topics – what is going on in the UK stock market?
I return to the question - why isn’t more money going into UK companies, helping them to grow? In 2000, UK pension funds invested significantly more in UK equities compared to recent years. According to the data from Bloomberg:
UK pension funds allocated approximately 53% of their assets to UK equities in 2000.
The combined share of the UK stock market owned by UK pension funds and insurance companies was 39% in 2000.
For private-sector pension funds specifically, the allocation to UK equities was over 50% of the average pension fund portfolio in 2000.
As of 2025, UK pension funds have significantly reduced their ownership of UK equities compared to historical levels. This shift away from UK equities is part of a broader trend of de-risking and diversification, with pension funds increasing their allocations to bonds and global equities. The current allocation to UK equities by UK pension funds varies slightly depending on the type of pension scheme, but is significantly lower:
Defined Contribution (DC) pension funds allocate approximately 8% to UK listed equities.
Private Defined Benefit (DB) pension schemes invest around 11% in UK equities.
Local Government Pension Schemes (LGPS) have the highest allocation, with about 17% invested in UK listed equities.
As mentioned, the pension funds have replaced their holdings in UK Equities with UK Gilts – the so-called risk-free return in a portfolio. However, these days Gilts are not remotely risk free unless you hold from issue to maturity, and we heard a lot about pension funding issues when Kwarteng / Truss rocked the Gilt market in 2022.
The introduction of Financial Reporting Standard 17 in 2000 required companies to disclose pension fund deficits as financial liabilities. This led many pension funds to seek lower-risk investments, moving away from equities towards bonds. Many defined benefit (DB) pension schemes have adopted "de-risking" or "liability-driven investment" (LDI) approaches, again favouring government and corporate bonds over equities. In addition, as many DB schemes close to new members and mature, they tend to shift towards more conservative investments.
This change is quite an issue. Pension funds and insurance companies would previously take a long-term view, giving security to companies to spend and invest without a short-term call on capital. When one of these companies wanted to raise money, they would go and see their top institutional shareholders and request additional funding commitments to raise the money for growth and expansion – often referred to as a rights issue. (i.e. the right to provide the capital before anyone else, often at a discounted price).
This worked for many years as core long-term shareholders validated the capital raising request by committing the capital, thus giving confidence to other shareholders to join in and invest further capital themselves. Without this commitment from pension funds and insurers, the supply of new capital to UK businesses has dried up.
If a company finds it hard to attract new capital, expenditure and growth reduces, creating a defensive business. Reduced growth means these UK companies need to find other ways to attract investors – like paying out a dividend. However, if the company is growing slowly, and has to pay out a proportion of this lower growth in dividends, it could start to grow even more slowly still. This is one of the reasons the UK market yields twice that of the US market, trying to attract capital from the superior growth opportunities in the US.
It is not all bad news. These low valuations are attractive to overseas investors, who may feel that if they take the stock to their home market, they may be able to spark a recovery, prompting M&A activity. A good example is ARM, a UK chip designer. ARM was worth £24 billion ($32 billion) when it left the UK stock market in 2016 after being acquired by SoftBank. As of today, now being listed in the US, ARM's market capitalization is $146.47 billion, showing a significant increase in value since its departure from the London Stock Exchange. Part of this change in valuation is certainly due to the new surge in Artificial Intelligence; however, some is also due to the new listing. You could argue listing in the US with the vast swathes of money moving into passive US equities looking for growth, leads to significant capital inflows to companies listed in the US versus the UK merely by being part of the most popular index amongst investors these days. The US has a broader investor base, with over 60% of Americans investing in the stock market, mainly via their required 401(k) employer sponsored savings plans.
The UK pension asset allocations clearly need to change to help a resurgence in the UK stock market. Chancellor Rachel Reeves spoke about consolidating some of the 5,500 UK pension funds into fewer pension “megafunds”. Discussions have been held around the consideration to merge 86 council pension schemes, managing some £354 billion of assets into larger funds overseen by fund managers, rather than actuaries matching assets with liabilities. This consolidation would allow pooled funds the scale to take long term views, release assets into the UK economy in areas such as infrastructure and tech startups and take sensible risk management decisions. Undoubtedly episodes like Robert Maxwell taking £300m from Mirror Group pension assets led to greater regulation and reduced risk taking, however maybe this has gone too far.
The UK government and regulators certainly need to come together and find better ways of encouraging investment into UK markets, or else the gap between the UK and the US markets will only grow, stifling our productivity and economic growth. Regulatory reform needs to strike a better balance between risk management and growth-oriented investments and rather than challenging them, the government must surely introduce more tax incentives or other measures to encourage pension funds to invest in UK equities, particularly in smaller and mid-sized companies that are ignored by global investors.
The key point is collaboration – a realistic plan to foster partnerships between pension funds, government, and industry to develop strategies for increasing domestic equity investment could once again unlock significant capital for domestic businesses. I have my fingers crossed. Do have a good weekend.
Comments