Uk Pension Funds: Where Does The Money Go?

what do uk pension funds invest in

Pension funds in the UK have been criticised for not investing in fledgling businesses, particularly in the technology and science industries. The UK government has been pushing pension funds to invest in UK businesses to boost the economy. From 2027, pension funds will have to publicly disclose how much they invest in UK businesses. Defined contribution pension pots will be required to make the disclosures by 2027, and performance data will also need to be compared against competitors. The UK pension fund industry is worth £2 trillion, with defined-benefit schemes making up £1.3 trillion and defined-contribution schemes making up £600 billion.

shunadvice

UK pension funds invest in UK businesses

Pension funds are a significant source of investment in the UK, with the government's auto-enrolment rollout driving huge growth in investment in UK pension funds. As part of the government's plan to boost British businesses and increase returns for savers, pension funds are now required to publicly disclose their level of investment in the UK, including their costs and net investment returns. This will allow employers and savers to compare schemes and make informed choices.

In July 2024, two of the largest City firms, Phoenix Group and Schroders, announced a joint venture to invest up to £20 billion of pension money in fast-growing UK businesses, particularly those that are not listed on the stock market. This initiative, called Future Growth Capital, aims to invest in high-growth sectors such as green energy, wind farms, solar power, property, and small businesses.

The UK government has also been encouraging pension schemes to invest in private markets to stimulate economic growth, with Labour announcing its intention to establish a "future growth fund" if it comes to power. This focus on investing in UK businesses is part of a broader effort to align the country's financial assets with innovative homegrown ventures and boost the domestic economy.

While there are challenges and considerations, such as the need to balance risk and return, the convergence of interests between savers in defined contribution (DC) pensions and young companies seeking capital presents opportunities for investment and economic growth.

shunadvice

UK pension funds invest in overseas businesses

UK pension funds have been criticised for not investing in fledgling UK businesses, particularly in the technology and science industries. However, pension funds are increasingly investing in overseas businesses.

In 2018, net investment in overseas ordinary shares by UK financial institutions was £33,134 million. This figure is part of a wider trend of UK pension funds investing in overseas businesses.

The UK government has encouraged pension funds to invest in overseas businesses as a way to stimulate economic growth. The government's focus has been on UK-listed companies and private equity initiatives, but the bonds markets, particularly infrastructure bonds, have also been highlighted as an attractive investment opportunity for pension funds.

Overseas businesses in high-growth sectors such as green energy, wind farms, solar, and property have become increasingly attractive to UK pension funds. For example, Phoenix Group and Schroders have launched a joint venture called Future Growth Capital, which aims to invest between £10 billion and £20 billion in private markets over the next decade. This includes investing in overseas businesses as well as UK businesses.

By investing in overseas businesses, UK pension funds can diversify their portfolios and potentially achieve higher returns for their members. However, there are challenges to investing in overseas businesses, including regulatory requirements and tax implications that vary by country.

shunadvice

Defined contribution pension pots

Defined contribution pension schemes, also known as money purchase schemes, are a type of pension plan that allows individuals to build up a pot of money for retirement. The size of the pension pot depends on factors such as the amount contributed, investment performance, and the choices made at retirement. These schemes can be set up through an employer or privately by the individual.

Contributions to defined contribution pension pots can be made by both the employee and the employer. If the scheme is through a workplace pension, the employer typically deducts the employee's contributions from their salary before tax. Private pension schemes, on the other hand, require the individual to arrange contributions themselves. The money in these pension pots is then invested by the pension provider in various assets, such as shares, stocks, and other investments. The value of the pension pot can fluctuate depending on the performance of these investments.

When it comes to taking money from a defined contribution pension pot, individuals have several options. They can choose to leave their money invested in the pension scheme, withdraw it as a lump sum, invest it in the stock market, or a combination of these options. It's important to consider factors such as long-term health, life expectancy, care needs, and other sources of income when deciding how to use the pension pot. Additionally, seeking advice from a regulated independent financial advisor is recommended to make informed decisions.

One advantage of defined contribution pension schemes is the tax relief on contributions. This means that the income tax individuals would normally pay to the government goes towards their pension instead, helping to build their pension pot faster.

While defined contribution pension schemes offer flexibility and control over investments, it's important to carefully consider the risks and fees associated with different options. For example, investing in the stock market through income drawdown schemes may incur high fees and does not guarantee a fixed income.

In conclusion, defined contribution pension pots offer individuals a way to save for retirement by building a pot of money through contributions and investments. The options for accessing and utilising the pension pot provide flexibility but require careful consideration to ensure individuals make the most of their retirement savings.

shunadvice

Defined benefit pension schemes

The value of defined benefit pension schemes is not dependent on investments or contributions but rather on the rules of the pension scheme. However, to spread investment risk, these schemes may invest in a range of assets, including company shares, property, and long-term government bonds.

The UK government has been encouraging pension schemes to invest in UK companies, particularly in the technology and science sectors, to boost the economy and increase returns for savers. Defined benefit pension schemes make up a significant portion of the UK pension fund industry, with £1.3 trillion in mature defined benefit schemes as of September 2022.

The market value of private sector defined benefit and hybrid pension schemes increased by 6%, from £1,111 billion to £1,179 billion, between 30 September 2023 and 31 March 2024. This growth was driven by rises in long-term debt securities and insurance policy assets. The government has also introduced pension fund reforms to increase transparency and improve outcomes for savers. By 2027, pension funds will be required to publicly disclose their levels of investment in British businesses and their costs and net investment returns.

shunadvice

Pension funds and UK growth capital

Pension funds in the UK have been criticised for not investing in fledgling businesses, particularly in the technology and science industries. The UK government is seeking more growth capital, and pension funds are an obvious source. However, there are challenges to overcome, and the government is under pressure to propose reforms to unlock pension investments.

The UK pension fund industry is worth around £2 trillion, with defined-benefit (DB) schemes making up £1.3 trillion of that figure. DB schemes are considered mature, with many fully funded and aiming to pass their assets and liabilities to an insurance company. This means they require liquid assets, and their focus is on low-risk investments such as government and corporate bonds. These schemes are less likely to invest in riskier assets such as equities and start-up companies. Instead, they could play a role in investing in bonds to fund infrastructure projects, which would also offer the liquidity many DB schemes require.

Defined-contribution (DC) schemes, on the other hand, are a growing pool of £600 billion and are, in theory, a better source of growth capital. DC schemes tend to have a longer-term investment horizon and a higher risk tolerance, particularly among younger members. These schemes could benefit from investing in high-growth assets such as private equity and venture capital, which would support technology and science industries. However, there are challenges to DC schemes investing in private markets, including the potential difficulty and cost of selling holdings and the need for innovative solutions to offer funds with longer redemption periods.

The UK government has encouraged the pension industry to focus on low-cost solutions, and smaller schemes may lack the resources to access private markets efficiently. The Australian DC pension industry, for example, has benefited from a higher minimum contribution rate and an earlier focus on DC pension provision, resulting in a much larger pool of assets.

To increase pension investment in UK growth, the government could consider regulation, tax incentives, or establishing a pooled fund or Sovereign Wealth Fund to support young UK growth companies. Any measures should consider the interests of both tomorrow's pensioners and young companies that need capital.

Frequently asked questions

Pension funds are a way of saving for retirement, with contributions made by employers and employees.

Defined Benefit (DB) pension schemes are a type of pension fund that promises a certain level of pension benefits upon retirement. These schemes are typically mature and have enough assets to pay future benefits. They focus on investing in low-risk assets such as government and corporate bonds.

Defined Contribution (DC) pension schemes are a type of pension fund where the contributions are defined, but the benefits at retirement are not guaranteed. DC pension schemes tend to have a longer-term investment horizon and a higher risk tolerance, seeking higher levels of pension income.

The UK government is requiring pension funds to publicly disclose their level of investment in UK businesses by 2027. This is part of an effort to boost the British economy and increase returns for savers. Underperforming funds will not be allowed to take on new business.

Pension funds face challenges such as limited liquidity, high costs, and the need to balance risk and return. They also need to consider the interests of beneficiaries and tomorrow's pensioners, diversifying their investments globally rather than solely focusing on UK businesses.

Written by
Reviewed by
Share this post
Print
Did this article help you?

Leave a comment