A dire outlook for the UK economy is the primary cause of the UK’s capital markets decline and the role of pension funds in causing the malaise has been “overstated”, a top analyst group has said.
A major slide in investment from pension funds into listed UK firms has been pointed to as a key driver of decline in the UK’s stock market, with senior City figures recently calling on Jeremy Hunt to accelerate consolidation among pension funds to unlock a wave of investment.
However, analysts at London-based research outfit Capital Economics have warned that the significance of pension funds has been “overstated of late” and the sluggish performance of the UK economy was the primary cause.
“There is likely to be more than one explanation for the gap in stock market valuations,” the analysts said.
“An alternative explanation, for example, that appears more plausible to us, is that investors may simply be more downbeat on the long-term growth prospects of the UK (and euro-zone for that matter) economies, to which the earnings of their respective stock markets are naturally more exposed.”
The pressure to unlock pension cash comes amid a scramble from political figures and officials to stem a flood of firms away from London as they chase higher valuations in New York.
The government has commissioned a series of reviews in the past three years in a bid to encourage investment into UK equity markets.
Some blame for the slide in investment has been apportioned to accounting rule changes in 2000, which require firms to disclose the deficits of their defined benefit pension schemes as financial liabilities in their accounts.
The move triggered a shift in investment from equities into bonds, with just four per cent of the UK stock market now held by pension funds – down from 39 per cent in 2000, according to a new report from think tank New Financial.
Capital Economics analysts said however that the lowly valuation of listed UK firms “doesn’t appear to tally with the timing of the accounting change” and any reform to UK pension regulation would be “unlikely to be a silver bullet.”