UK pension fund allocations to London-listed shares has fallen to 4.4% compared with over 50% of their assets 25 years ago, according to a study by think-tank New Financial.

“As UK pensions have switched out of UK equities, they have helped feed a doom loop of lower demand, lower valuations, and a less dynamic market,” said the report.

The study is an “analysis of investment in domestic equities and of home bias by pension funds in the UK and around the world.”

The study said: ” … this report … shows that on virtually every metric, UK pensions are towards the bottom of the pack in terms of their allocation to domestic equities compared with a dozen other developed pension systems on both an absolute and relative level.”

The report said the 4.4% allocation “disguises big differences between the main ‘buckets’ of pensions in the UK: corporate defined benefit schemes allocate just 1.4% to UK equities, public sector defined benefit schemes 9%, and defined contribution pensions around 8%.”

It said: “… this allocation to domestic equities is among the lowest of any developed pension system around the world with only Canada, the Netherlands, and Norway having a lower allocation.

“It is less than half the weighted average allocation to domestic equities across our sample excluding the US. The overall allocation to equities by UK pension funds of 30% is lower than every market except Canada, Denmark, and the Netherlands …

” … the main drivers of this decline have been the de-risking of private sector DB schemes and the shift across UK pensions from a ‘UK centric’ approach to a global market-weighted approach to equities with investment allocated broadly in line with a market’s weighting in global indices.

“As UK pensions have switched out of UK equities, they have helped feed a doom loop of lower demand, lower valuations, and a less dynamic market.”

The report said that UK pension funds have a significantly lower allocation to private equity and infrastructure assets — around 6% combined — than many of their peers. (Canadian public sector pensions 34%, Finnish pensions 17%, and Australian supers 14%).

“The hallmark of pension systems with a high allocation to these assets is concentration and the scale of individual funds: the UK has the least concentrated and most fragmented pension system of any market in our sample,” said the report.

New Financial added: “This report highlights that UK pension funds have a significantly lower absolute and relative allocation to domestic equities and unlisted equities than most of their counterparts in developed pension systems around the world.

“It shows that UK pensions could increase their allocation to the UK market by 50% to 100% and still be comfortably in line with their international peers and historical norms.”