Bulk up pension pots and help save the stock market, firms told

British firms should be forced to ramp up “woefully inadequate” contributions to pension pots in order to boost returns for savers and get money flowing back into London’s beleaguered stock market, a top think tank has said.

In a new report today in partnership with Abrdn and Citi, think tank New Financial called for a “reframing [of] the essay question” on how to breathe life into London’s markets, claiming that the UK should be thinking of how to deliver better returns for savers rather than simply getting cash flowing into listed businesses.

The calls come amid a raging debate in the Square Mile over how to get more retirement cash flowing into domestic companies, after pension funds’ holdings of UK PLC has cratered in the past two decades.

Just four per cent of the UK stock market is now held by pension funds — down from 39 per cent in 2000, according to New Financial.

In its report today, the think tank said that central to boosting returns and the flagging markets should be an increase in contributions to the pension pool and a focus on increasing participation in pension schemes.

“The minimum pension contribution of eight per cent of eligible earnings for defined contribution [DC] pensions is woefully inadequate compared with other countries,” said William Wright, chief of New Financial, in the report. 

“It is also unfairly skewed to individuals rather than employers, and probably needs to double in the longer term.”

The current contribution to DC pots sits at eight per cent, with three per cent of that made up by employers and the remaining five per cent by employees.

Among a long list of recommendations, New Financial called for the figure to be ramped up to 12 per cent with employers shouldering more of the burden. The UK is one of the few countries where workers pay more into their pots than the companies they work for.

Better participation rates in pension schemes and consolidation among the fragmented UK market were also needed to boost returns and get more money moving into companies, New Financial said, as well as a move away from the focus on “costs at all cost”.

Former pensions minister and partner at Lane Clarke and Peacock, Sir Steve Webb, told City A.M. that levelling the playing field between the contributions from employers and employees was key to boosting the size of funds and ultimately the amount of money available to invest.

“Many people may assume that eight per cent was set because it was the ‘right answer’ to how much people need to save;  but in reality it was a compromise at the time between how much employers were willing to sign up to and also how much a government could ask of workers,” he said. 

“A first step would certainly be to level contribution rates between employee and employer — there are very few countries in the world like the UK where workers pay more than their employers.”

The calls came just after Abrdn chief executive Stephen Bird called for pension contributions to double to 16 per cent in order to get more money to pensioners and flowing into UK companies. But the Federation of Small Businesses pushed back on the calls and said it would place a higher burden on smaller companies.

Pension cash has been flooding out of UK-listed firms and into safer bond holdings after tax tweaks brought in around 2000 forced companies to shift pension liabilities onto their own books.

The flow of cash has coincided with flatlining growth on the stock market while international peers have rocketed ahead.

Over the decade to the end of 2022, the combined value of the UK stock market flatlined at £2.6 trillion while the US market has exploded in value by 67 per cent in real terms.

A lack of equity investment from UK pension schemes has in part been blamed for the flagging state of the UK’s market in initial public offerings. 

In a letter to the Chancellor in March, the Capital Markets Industry Taskforce headed by London Stock Exchange chief Julia Hoggett called for Chancellor Jeremy Hunt to push through reforms to get money moving into UK stocks, including rolling out a wave of consolidation.