Dear Ms Reeves,
CC: Ms Kendall
Subject: Proposal for Strengthening the UK Stock Market through Pension Fund Investment Mandate
We propose a cost-effective strategy to bolster the UK stock market by introducing a mandatory investment rule for pension funds. This would significantly increase capital inflow into UK listed equities without additional government costs. Below are the key points of the proposal, supported by updated data and third-party research.
Mandatory Rule for Pension Funds:
•Require pension funds to maintain at least 20% of their listed equity exposure in UK equities to retain tax-advantaged status. This would revert pension funds to their UK equity allocation as recently as 2017.
Capital Inflow into UK Equities:
•The total market capitalisation of the FTSE 100 is approximately £2.1 trillion.
•The Parliamentary Pension Scheme invests just 2.8% of its overall quoted shareholdings in UK listed companies.
•The weighted average proportion of pension fund equities invested in UK quoted stocks has fallen to 7.6% in 2023 from 48.2% in 2008.
As of 30 September 2023, the market value of private sector defined benefit and hybrid (DBH) pension schemes was £1,123 billion, and the market value of private sector defined contribution (DC) and public sector DBH pension schemes was £741 billion, making £1,864 billion overall.
•Therefore, the overall amount invested in UK equities is just £25.5 billion.
•Increasing UK equity exposure to 20% would direct an estimated £41.6 billion into UK equities, equivalent to about 2% of the current FTSE 100 market capitalisation, significantly boosting market liquidity and stability.
Reversing Current Trends:
•UK equity funds have seen consistent outflows, with £13.6 billion withdrawn in 2023 alone (in 2022 it was £12 billion).
•Our proposal would counteract these negative flows and restore confidence in UK equities.
Enhancing Valuation and IPO Appetite:
•Increased investment would likely improve UK equity valuations, making them more attractive to domestic and international investors.
•A March 2024 analysis by SCM Direct found UK stocks traded at a 25% discount to global peers.
•A stronger stock market could stimulate greater appetite for Initial Public Offerings (IPOs), encouraging more companies to list in the UK.
Preventing Corporate Relocations:
•A robust UK equity market could reduce the likelihood of companies relocating abroad, helping boost UK employment and maintain corporate tax revenues.
Cost to HMRC:
•The cost to HMRC would be minimal, potentially zero, and could lead to increased tax revenues by preventing capital flight and encouraging economic growth.
Flexibility for Pension Funds:
•Pension funds would retain autonomy in their overall investment strategy across broad asset classes.
•A mandated rule would ensure a minimum allocation to UK listed equities within the overall listed equity exposure, supporting the domestic market while allowing funds to pursue their preferred investment mix.
Potential for Enhanced Returns:
•UK stocks are trading at historically low valuations compared to international peers, presenting a unique opportunity for pension funds.
•The FTSE 100 price-to-earnings (P/E) ratio stands at 11.9x prospective earnings as of July 2024, significantly lower than the S&P 500's 23.2x P/E ratio.
•Reducing exposure to overvalued US equities, particularly the "Magnificent 7" Tech stocks, could mitigate risk and potentially enhance returns. Nvidia currently accounts for 6.6% of the S&P 500 Index and is valued at 44x prospective earnings.
•Reallocating funds to undervalued UK stocks could capitalise on potential value appreciation and higher dividend yields.
Diversification Benefits:
•Increasing allocation to UK equities would improve geographical diversification, reducing overreliance on the US market.
•This shift could hedge against potential corrections in overvalued US tech stocks, which have driven much of the recent market gains.
Long-term Value Proposition:
•UK equities offer attractive dividend yields, averaging 3.9% compared to just 1.3% for the S&P 500, providing steady income for pension funds.
•Our proposed mandate would encourage pension funds to take advantage of these undervalued assets, potentially leading to improved long-term returns.
Market Rebalancing:
•This strategy could contribute to a more balanced global equity market, reducing the disparity between UK and US stock valuations.
•It may also stimulate increased interest in the UK market from international investors, further supporting stock prices and market liquidity.
By implementing our proposal, pension funds could not only support the UK stock market but also potentially improve their own returns by capitalising on the current valuation discrepancies between UK and US equities. This approach aligns with prudent investment strategies of buying undervalued assets and reducing exposure to potentially overvalued ones. We urge you to consider this proposal and initiate discussions with relevant stakeholders to implement these changes. Your support would significantly enhance the resilience and attractiveness of the UK stock market, boost our economy, and signal that Labour is a government that backs Great Britain.
Thank you for your attention to this matter. I look forward to your response.
Yours sincerely,
Alan and Gina Miller
Co-Founders of SCM Direct
