Demand a larger allocation of default pension funds to UK stocks

Is this a good idea for pension savers? It might help revive London's struggling stock market

In an effort to stop the London stock market's decline, a capital markets think tank is recommending that default pension funds allocate 2025% of their equity holdings to UK companies. Despite "marginally lower" returns, two-thirds of savers say UK pensions should put more money into domestic stocks.

The London Stock Exchange's CEO, Julia Hoggett, chairs the Capital Markets Industry Taskforce, which collaborated with think tank New Financial to publish its findings. She asserts that over the last 25 years, the UK has underinvested in itself, "from infrastructure and private companies, through to the companies listed on its public markets."

"It's crucial to pull the levers necessary to reverse this underinvestment because the need to stimulate growth is profound," she continued.

Although UK stocks have done well so far in 2025, they remain consistently undervalued, and businesses are choosing to list in other countries, like the US, where they can obtain a higher valuation. Additionally, foreign buyers and private equity firms have jumped in to acquire UK companies at a discount.

Professional services firm EY reports that 88 companies delisted or moved their primary listing away from the London Stock Exchange last year, the most since 2009. Just Eat, Ashtead, a company that rents out equipment, and Flutter Entertainment, the parent company of Paddy Powers, were among the notable departures.

Part of the issue is a deficiency of pension investment. According to New Financial, defined contribution (DC) pension plans, on average, only 42.9 percent of total assets are allocated to UK stocks. For domestic stocks, the global average is 13%.

Through initiatives like the Mansion House Accord, wherein 17 workplace pension providers voluntarily agreed to invest at least 5% of their assets in the UK by 2030, the government is attempting to address the problem. The recommendations from New Financials go one step further and suggest allocating 2025% of default funds. Although savers could choose not to use their default fund, the majority choose to use this automatic option.

William Wright, the founder of the think tank, stated that "strong domestic pension fund bases are really important for UK equity markets, and vibrant public equity markets are crucial for the health of the UK economy." Out of all the reform options put forth in this debate, ranging from doing nothing to imposing mandates, we believe the UK-weighted default fund offers the best balance.

For pension savers, what would that mean?

The report suggests that by 2030, the UK-weighted default fund could have a "game-changing impact" on UK equities, increasing total investment by about 76 billion (+230 percent). How would it affect those who save for pensions, though?

Although UK stocks have performed well this year, they have not kept pace with their US and international counterparts in recent decades. According to LSEG data, UK equity funds performed worse than US equity funds in 17 of the previous 20 calendar years. Throughout 12 of the 20 years, they underperformed global funds.

The truth is that pension engagement is low in the UK, even though savers could choose not to participate in their default fund if they did not want such high exposure to UK stocks. Hargreaves Lansdown reports that 60% of people are not even aware that their pension funds are invested. 99 percent of the members of Nest, one of the largest workplace pension providers in the UK with nearly 14 million members, are in default funds.

"We need to make sure our default fund is the right choice and does the hard work of investing on their behalf," Nests Chief Investment Officer Liz Fernando recently told BFIA, stating that the majority of its members remain in the first fund they invest in.

Industry experts' reactions to the government's announcement of new targets under the Mansion House Accord earlier this year were not entirely uniform. Although pension schemes' commitments were voluntary, the government has stated that it will use its reserve power to set "binding asset allocation targets" in the Pension Schemes Bill.

"This is where I have some reservations," stated Jason Hollands, managing director of Evelyn Partners, a wealth management company. The fiduciary duty of pension plans is to provide savers with high returns; therefore, it is risky for any government to impose its will on asset allocation choices.

Pension savers may wonder if it is their duty to save the UK stock market, especially since many already have sizable retirement deficits. An alternate strategy is to provide rewards.

Hollands stated: "By offering a competitive tax environment, cutting back on excessive red tape, welcoming entrepreneurs from around the world, and taking steps like eliminating stamp duty on share purchases, the UK can become a desirable location for businesses and investors (both domestic and foreign)."

Some of these goals are what the government hopes to accomplish with its Leeds Reforms.