Pension funds did not trigger UK stock market decline

Monday 01 May 2023 15:46

A drop in investment in pension funds has been cited as a key driver of low valuations in the UK

The dire outlook for the UK economy is the main cause of the decline in UK capital markets and the role of pension funds in the malaise has been “exaggerated”, a group of leading analysts have said.

A significant drop in investment pension funds in listed UK companies has been singled out as a key factor in the decline of the UK stock market, with senior City officials recently calling on Jeremy Hunt to accelerate the consolidation of pension funds to unlock a wave of investment.

However, analysts at London-based research firm Capital Economics warned that the importance of pension funds has been “overstated of late” and that the poor performance of the UK economy was the main cause.

“There is probably more than one explanation for the gap in stock market valuations,said the analysts.

“An alternative explanation, for example, which seems more plausible to us, is that investors could simply be more pessimistic about the long-term growth prospects of the UK economies (and the eurozone for that matter), to which the profits of their the respective stock markets are naturally more exposed.

The push to unfreeze pension funds comes amid a scramble by politicians and officials to stem a tide of companies away from London as they seek higher valuations in New York.

The government has commissioned a series of reviews over the past three years in an effort to encourage investment in UK stock markets.

Part of the blame for the drop in investment was blamed on changes to accounting rules in 2000, which require companies to report deficits from their defined-benefit pension plans as financial liabilities in their accounts.

The move sparked a shift in investment from stocks to bonds, with just 4% of the UK stock market now held by pension funds, down from 39% in 2000, according to a new report from think tank New Financial.

Analysts at Capital Economics, however, said the low valuation of UK listed companies “does not seem to match the timing of the accounting change” and that any reform of UK pensions regulations would be “unlikely to be a silver bullet”.

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