Souter slams £2tn pension funds for ‘lack of faith’

Brian Souter

Stagecoach chairman Brian Souter has criticised the UK pension fund industry for its “lack of faith” in companies and young entrepreneurs and for investing too much of its £2 trillion in Government debt securities instead of investing in the shares and bonds of UK firms.

Souter, president of accountancy trade body ICAS, made the comments in an article he wrote in the organisation’s CA magazine.

“You might expect our pension schemes to be investing heavily in businesses and growth for the future, but they’re not,” wrote Souter.

“Official figures from the Pension Protection Fund (PPF) clearly show that, over the last decade, pension schemes have by and large switched from investing in businesses — through equities (shares) and a wide range of corporate bonds — to investing instead much, much more in UK government gilts and a narrow range of similar bonds.

“In 2006, the typical UK pension scheme invested more than 60% in equities and less than 30% in gilts and bonds.

“Rolling forward 10 years and the position is reversed: the typical scheme now holds less than 30% in equities, while more than 50% is in government gilts and bonds, and the balance in other investments such as private property and private hedge funds etc …

“Over that same time, the pure weight of money buying government gilts and bonds has pushed up prices, meaning that the expected return on those assets has plummeted – indeed, many pension schemes now investing in inflation-linked gilts are actually expecting to lose money on them; they are being bought on a prospective negative return.”

Souter added: “When we had a fresh look into some of the issues affecting pensions, I was really surprised but also disappointed at the level of pessimism shown by the pension industry both about the future prospects for business and its lack of faith in investing in our youth — our next generation of business people and entrepreneurs.

“A real concern is that this lack of belief is creating a vicious circle of poor confidence with low aspiration that seems to have convinced nearly everyone that the pensions of the past are just not affordable for the next generation …

“The level of pre-funded pension commitments in the UK is colossal: the value of investment assets in the UK’s 6,800 or so defined benefit (DB) pension schemes is around £1,500 billion … with around another £217 billion of investments in local government pensions …

“It is clear, therefore, that the proper investment and stewardship of these assets must be of great importance to the UK and that a misallocation of those assets will have an adverse impact on the enterprise economy.”

Souter concluded: “I’d like to see more of that colossal vault of wealth stored in the £2 trillion of funded pension scheme assets being put to work across the generations.

“By reversing the recent trends towards gilts and bonds, in effect we should break the bonds.

“Then we will best support and sustain the pension benefits by encouraging investment of pension assets in enterprise, growth and jobs.”